Company Reports

GEA’s fourth-quarter result provided us with little in the way of surprise, with the wide-moat capital equipment supplier delivering full-year EBITDA of EUR 774 million, up about 9% year on year and aligning with our expectations. Solid organic sales growth of about 4% and 60 basis points of EBITDA margin progression, to 14.4%, supported earnings growth in 2023. Nonetheless, new orders remained weak in the final quarter of 2023—with liquid & powder and food & healthcare technologies segments particularly soft—capping off a year of subdued demand with full-year order intake growing just 0.8% organically. While we expect consequent softening in earnings growth in 2024, GEA shares continue to screen as appealing and our long-term expectations for solid earnings growth remain unchanged.

GEA’s new order intake continues to underwhelm in late 2023, with the third-quarter organic order intake falling 1.7% year on year, and marking the second consecutive quarter of soft new orders for the wide-moat food and beverage equipment supplier. For context, year-to-date new orders have grown just 1.6% organically, comparing unfavorably with our long-term top-line revenue expectations of about 4.5%, and GEA’s medium-term annual revenue growth target of 4%-6%. Still, GEA’s soft new order intake chimes with the recent performance of a number of its peers—including wide-moat Alfa Laval and other European food processing players–that have reported a similar soft order intake in late 2023, citing lower spending on capital projects amid the present uncertain economic conditions. While we expect the present new order malaise to weigh on organic sales growth in 2024, our longer-term outlook for GEA remains unchanged as does our EUR 43 fair value estimate. GEA shares screen attractively, trading at a 21% discount to our unchanged valuation.

We make no change to our EUR 43 fair value estimate for GEA Group following a transfer of analyst coverage. We also maintain our wide moat rating, Medium Morningstar Uncertainty Rating, and Standard Morningstar Capital Allocation Rating for the leading supplier of highly engineered capital equipment and solutions to the food processing and pharmaceutical manufacturing industries. While GEA’s order intake in the second quarter of 2023 was a touch soft—new orders grew just 2.4% organically—our long-term expectations for robust earnings growth remain unchanged. Consequently, GEA shares screen attractively, trading at a 24% discount to our unchanged fair value estimate.

GEA Group is a leading supplier of highly engineered capital equipment and solutions to the food processing and pharmaceutical manufacturing industries. GEA’s reputation for innovation and safety positions the company to win equipment orders—particularly from customers who are sensitive to reputational risk from incidences of food contamination and those who wish to differentiate their product offerings.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. The company's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.

The quarter was a mixed bag for GEA as organic growth was 2.4%, below the 3%-4% rate we would expect its market to grow at on a midcycle level. The company performed well in other areas, however. Organic revenue grew at 9.4% with especially strong growth in Latin America and the chemical segment. Management confirmed it expects 2023 organic revenue growth above 8%. As we discussed earlier in the year, guidance looks achievable given the usually high degree of visibility that the company's high order backlog is providing for 2023 revenue. Order backlog rose 2.9% from the previous year, a continued strength for the company providing increased visibility for the second half of 2023 and early 2024. While the book-to-bill ratio fell to 1.03 from 1.1 a year ago, it remains above 1.0, indicating strong demand.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. The company's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.

Strong order growth and pricing supported GEA's nearly 9% organic revenue growth for 2022, well above the 3%-4% rate we would expect its market to grow at on a midcycle level. Notable 2022 revenue drivers included automated milking equipment, new food machinery (for alternative proteins), and service revenue. The business also saw several large orders during the year. Generally, this is a signal that the market is closer to peak cycle with larger orders contributing to a higher portion of the order book during peak times. For 2023, management expects organic revenue growth above 5%. Although this figure would also be above the average midcycle level, the guidance looks achievable given the usually high degree of visibility that the company's high order backlog is providing for 2023 revenue. Roughly three quarters of the 2023 expected machinery revenue is already in the order backlog. We maintain our wide moat rating. Shares are trading in line with our EUR 43 fair value estimate.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. The company's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.

GEA Group's third-quarter results were reassuringly solid with 10% organic sales growth and EBITDA margin up 50 basis points to 14.7%. However, orders were down just under 1% organically on a tough year-ago comparison. Even so, demand seems to be slowing with some potential projects in the pipeline perhaps having less chance of conversion to orders due to customer delays. Capital expenditure outlays are the first to come under budget scrutiny in a downturn. Therefore, we would expect orders to be soft during 2023 from potential macroeconomic headwinds. That doesn't change our long-term outlook for the company as food processing equipment serves a critical role in efficient food production. However, we have made adjustments to our forecasts. GEA is in an advantageous position coming into 2023 as it has a large backlog of orders that when executed will support revenue in 2023, even if orders slow down. Therefore, we forecast higher revenue growth in 2023 versus 2024 as we factor in a slowdown during 2023 orders hitting 2024 revenue. All that said, our fair value remains EUR 43 and we retain our wide moat rating.

Orders for farming technology equipment, as well as strength across most other end markets, fed GEA's group demand in the second quarter, with operating leverage and restructuring measures supporting the company's EBITDA before restructuring margin. Group book/bill remained above 1 times at 1.1, lower than 1.37 in the first quarter, but still indicating strong demand. Current favorable order demand drove 9% organic revenue, while EBITDA before restructuring margin came in 10 basis points lower than last year at 13.2%. We consider this a solid result considering inflationary pressures across industrials. Operating leverage, service revenue growth, and the company's efforts to rightsize its global manufacturing footprint were likely positive margin offsets to the cost increases. We maintain our wide moat rating. The shares offer attractive upside against our EUR 43 per-share fair value estimate.

GEA Group’s book-to-bill spiked to 1.37 times in the first quarter with orders exceeding company-provided consensus but supply chain bottlenecks holding back revenue to modestly below expectations. Importantly, the company’s EBITDA margin was up 90 basis points to 12.3%. Management continued to prove its credibility on profit flow-through from restructuring gains. We forecast long-term EBITDA margins just above 14% as we believe that the company’s equipment holds pricing power, which previous management was unable to leverage. GEA Group’s food manufacturing end markets are made of conservative buyers, and vendor track records on equipment performance and hygiene features create an asymmetric risk/rewards relationship in switching equipment suppliers. GEA has a long-standing track record as premium supplier to many of the world’s largest food manufacturing groups. We maintain our EUR 43 fair value estimate and wide moat rating. Shares look attractive at current levels.

Supply chain disruptions and a timing lag on price increases in line with input costs caused GEA Group's full-year 2021 to come in slightly below our expectations. Sales grew by 1.5% on a reported basis, below our 4.8% estimate. However, EBITDA was slightly ahead of our forecast with the 13.3% EBITDA margin beating our and the company provided consensus estimate. However, underlying demand was strong across all divisions. We expect the company to make up for that shortfall and meet our current 2022 EBITDA forecast. Our wide moat rating remains intact, and shares currently offer 13% upside relative to our EUR 43 fair value estimate.

Following GEA Group’s solid third-quarter results and recent capital markets day, we are increasing our fair value estimate to EUR 43 per share from EUR 35. We maintain our wide moat rating. Two key factors are behind our fair value estimate increase. The first is a 60-basis-point bump to our long-term EBITDA margin, to 15.1%. The second is a higher revenue growth forecast in the medium term, to 4% from 3%. The benefits of new management's decentralization strategy have been showing in more consistent top-line performance as well as margin expansion. Growth in small base-level orders, which are less than EUR 1 million, have been encouraging, particularly around the company’s moatiest segment, separation flow technologies. These smaller orders contribute more than half of the company's new orders, and smaller orders within the SFT division are roughly one fifth of the group. SFT small orders have been outgrowing total small order growth throughout 2021.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. GEA's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.

GEA Group's second-quarter earnings were prereleased earlier but the full results indicated a continued margin recovery including gross margin expansion. We maintain our EUR 35.00 fair value estimate and wide moat rating. Orders and revenue grew organically by 30.00% and 3.00%, respectively. The strong order growth relative to order execution within the quarter, led to a book/bill well above 1.00 times at 1.12, showing solid demand momentum. Demand also compared favorably with precoronavirus levels; first-half 2021 orders were up by 10.00% over first-half 2019.

GEA Group increased guidance for the year with the midpoint of organic revenue growth at 6%, up from the previous 2.5%. The EBITDA midpoint guidance improved by 11%. For a company that used to seem like serial profit warner, we welcome the upgrade. Both targets are now above our full-year forecasts. EBITDA guidance is roughly 7% above our forecasts at the midpoint. The new revenue guidance range of 5%-7%, implies mid- to high-single-digit organic revenue growth over 2019. We believe GEA has better order visibility prompting the upgrade. We will review our forecasts when full second-quarter results are released on Aug. 13. We maintain our EUR 35 fair value estimate and wide moat rating.

We are making no changes to our forecasts and our EUR 35 fair value estimate for wide-moat GEA Group following a mixed first quarter. Shares are trading in line with our valuation, and a more promising revenue outlook would be the key driver to any upside in our forecasts, as our EBITDA margin targets are already slightly above management's targets. The company's restructuring has been going well with visible margin gains on headcount reductions and procurement savings, but revenue growth has been uneven. We think the company still has work to do on portfolio adjustments and acquisitions may be part of management's next playbook, possibly announced with the September capital markets day. Its debt ratings and liquidity position have improved since the restructuring started in 2019, paving the way for acquisitions. Revenue growth trends have been less impressive than margins relative to management's 2019-2022 targets with the company recently raising the floor margin target by 100 basis points but leaving the revenue target at an unimpressive 2%-3%.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. GEA's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.

GEA's 2020 results and updated guidance show meaningful gains from the restructuring program through margin expansion on a divisional and group level. The shares look attractive versus our EUR 33 fair value estimate, and our wide moat rating is intact. 2020 organic revenue declined 2.6%, in line with the midpoint of guidance on our forecasts. The 2020 EBITDA margin of 11.5% was actually in line with guidance for the lower end of 2022 margin previously given. Management's restructuring program is going well, with EUR 40 million in savings in 2020 and more to come next year. As a result, EBITDA was modestly stronger than our forecast at EUR 532 million versus the already raised guidance of greater than EUR 500 million.