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Here's Why You Should Buy Gates Industrial (GTES) Stock Now

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Gates Industrial Corporation plc (GTES - Free Report) has been riding high on improved and flexible manufacturing footprint, revitalized product portfolio, along with focused organic growth initiatives. Its shares have gained 28.8% year to date, outperforming the Zacks Engineering - R and D Services industry and broader Construction sector’s rally of 22.7% and 18.5%, respectively.

Furthermore, the stock still has upside potential left, as is evident from the recent earnings estimate revision trend. Earnings estimates for the first quarter and full-year 2021 have moved up 63.2% and 32.9%, respectively, over the past 30 days. This trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Major Growth Drivers

Sales Into Replacement & First-Fit Channels Showing Resilience: During fiscal 2020, approximately 64% of net sales were generated from replacement channels and 36% from first-fit channels globally. Sales into replacement channels were strong and less impacted overall, while that into first-fit channels showed strong acceleration throughout the second half of 2020. During fourth-quarter 2020, sales into replacement channels continued to accelerate from third-quarter 2020. The most notable improvement was witnessed in the first-fit business, particularly in industrial end markets wherein customers across Off-Highway, Diversified Industrial and On-Highway end markets increased their production levels.

Notably, both the company’s segments have been performing well. Core revenues in the power transmission segment grew 9% on a year-over-year basis and improved 9.4% sequentially in the last reported quarter. After total sales into replacement channels returned to core growth in third-quarter 2020, sales into OEM channels also followed suit during the fourth quarter.

Solid Margins: Improvement in gross margin achieved through a combination of volume benefits and productivity initiatives has been aiding its bottom line, and helping to offset COVID-related costs as well as inefficiencies. The company’s fourth-quarter adjusted EBITDA margin improved 190 basis points (bps) year over year. Although lower production volumes and related inefficiencies impacted adjusted EBITDA margin during the first half of 2020, it delivered adjusted EBITDA margin expansion of 110 bps in second-half 2020.

Its new manufacturing plants and higher labor flexibility played a key role to support growth. The Gates production system continues to provide a solid foundation for operational performance, thereby delivering strong productivity gains that drive outstanding year-over-year margin expansion.

It has solid prospects, as is evident from the expected earnings growth rate for 2021, which is pegged at 61.4%.

Higher ROE: Gates Industrial’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 7% compares favorably with the industry average of 6.8%, implying that it is efficient in using shareholders’ funds.

Other Key Picks

Other top-ranked stocks in the same space include Altair Engineering Inc. (ALTR - Free Report) , Mayville Engineering Company, Inc. (MEC - Free Report) and Howmet Aerospace Inc. (HWM - Free Report) , each carrying a Zacks Rank #2 (Buy).

Altair’s earnings are expected to grow 45.2% for 2021.

Mayville is expected to witness an earnings growth rate of 252.8% for 2021.

Howmetis expected to witness an earnings growth rate of 12.5% for 2021.

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