Company Reports

Wide-moat Geberit’s first-quarter results highlighted its strong pricing power through its gross margin expansion of 70 basis points to 73.1%, despite a challenging environment for businesses exposed to construction end markets. Resilient profitability has allowed Geberit to accelerate investment into marketing its recently launched product innovations, which will enable it to continue to extract pricing power and gain market share over its peers. Growth investments and wage inflation contributed to a slight drop in its EBITDA margin to 32.8%, but that still comfortably beat company-compiled consensus estimates by 100 basis points. EBITDA declined by 7% year over year or a mere 0.5% on a constant currency basis. Raw material costs are expected to continue to decline against the prior year, which will protect its profitability and allow Geberit to continue to invest in growth. We maintain our CHF 510 fair value estimate and view shares as fairly valued.

Geberit is the largest player in the European bathroom sanitary sector with a full range of capabilities on both sides of the wall. Exceptional and stable profitability is due to its brand reputation and close relationships with the key decision-makers for sanitary products, such as plumbers and retailers. While Geberit's brand reputation for reliability underpins its pricing power, its relationships with intermediaries is equally important to withstand competition. Geberit's end customer lacks meaningful expertise in behind-the-wall sanitary products and instead places complete reliance on specialized installers such as plumbers. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of the intermediary.

Wide-moat Geberit’s fiscal 2023 results confirm our investment thesis for the group. Strong pricing power and a relentless focus on productivity improvements supported generous capital returns to shareholders, despite weak demand from the construction sector. EBITDA margins expanded 310 basis points to 29.9% in a weak construction environment across Europe, evidence of its strong pricing power, which was further supported by a decline in raw material costs. Having recently revised our forecasts, following Geberit’s earnings prerelease in January, we maintain our CHF 510 fair value estimate and view shares as fairly valued.

Geberit is the largest player in the European bathroom sanitary sector with a full range of capabilities on both sides of the wall. Exceptional and stable profitability is due to its brand reputation and close relationships with the key decision-makers for sanitary products, such as plumbers and retailers. While Geberit's brand reputation for reliability underpins its pricing power, its relationships with intermediaries is equally important to withstand competition. Geberit's end customer lacks meaningful expertise in behind-the-wall sanitary products and instead places complete reliance on specialized installers such as plumbers. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of the intermediary.

Wide-moat Geberit expects to deliver an impressive 30% EBITDA margin for fiscal 2023, at the upper end of the 29%-30% guidance it previously provided. Geberit raised its prices by 8% during the year, underpinned by its brand reputation for reliability and close relationships with critical decision-makers for sanitary products, which has helped keep operating profit largely unchanged in fiscal 2023 in spite of a 5% decline in organic revenue. We expect the group’s EBITDA margin to improve marginally in fiscal 2024 from its impressive fiscal 2023 showing, due to higher volumes and further declines in raw material prices. Shares are trading in line with our CHF 510 fair value estimate, which we maintain.

Geberit’s strong pricing power and wide moat were evident during the third quarter, which helped deliver a 13% increase in operating profits, despite declining construction activity in Europe. Year-over-year price increases of 6%, combined with declining raw material costs and the group’s relentless focus on productivity improvements supported a 340-basis-point EBIT margin improvement to 24.5%. We weren’t surprised that management raised its full-year EBITDA margin guidance by 0.5% to 29.5% at the midpoint and had viewed its previous guidance as conservative given the spillover impact from price increases already implemented and a tailwind from lower raw material costs. Shares climbed 10% on Nov. 2, but still appear undervalued compared with our CHF 510 fair value estimate, which we maintain.

Wide-moat Geberit’s ability to withstand a 25% decline in volume and still deliver a 30% EBITDA margin is testament to the brands' strong pricing power and relentless focus on productivity improvements. Second-quarter organic revenue fell 14% in constant currency to CHF 769 million, considerably below company-compiled consensus of CHF 855 million. Destocking at wholesalers and a declining residential construction sector, particularly in the company's largest market in Germany, where residential permits have fallen sharply, were the main causes of lower volume. However, there is some positivity heading into the remainder of the year, as Geberit faces easier comparables and stock levels at wholesalers are below normal levels. While we lower our revenue forecasts for 2023 to reflect the challenging first half, our longer-term estimates remain unchanged, as does our CHF 510 fair value estimate, as we believe Geberit will be able to take market share from smaller competitors. The shares are trading in undervalued territory, offering a rare opportunity to acquire at a discount one of the highest-quality European industrial businesses under our coverage.

Geberit is the largest player in the European bathroom sanitary sector with a full range of capabilities on both sides of the wall. Exceptional and stable profitability is due to its brand reputation and close relationships with the key decision-makers for sanitary products, such as plumbers and retailers. While Geberit's brand reputation for reliability underpins its pricing power, its relationships with intermediaries is equally important to withstand competition. Geberit's end customer lacks meaningful expertise in behind-the-wall sanitary products and instead places complete reliance on specialized installers such as plumbers. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of the intermediary.

Wide-moat Geberit delivered solid first-quarter results, which were supported by the group’s strong pricing power underpinned by its brand reputation and close relationships with key intermediaries of sanitary products. The spillover effect of price increases already implemented managed to offset volume declines and help support 220 basis points of EBITDA margin expansion, to an impressive 33.1%. While demand remains under pressure because of the macroeconomic environment, we believe that Geberit will be able to maintain its current level of pricing, which will support profitability in the future as raw material costs decline against a high comparable. Consistent with our investment thesis, capital returns remain a key priority for Geberit. Share repurchases of CHF 63 million during the quarter helped deliver a disproportionate 8.6% growth in constant-currency earnings per share compared with net income growth of 4.9% (also in constant currency). We maintain our CHF 510 fair value estimate and view shares as fairly valued.

Geberit is the largest player in the European bathroom sanitary sector with a full range of capabilities on both sides of the wall. Exceptional and stable profitability are due to its brand reputation and close relationships with the key decisionmakers for sanitary products, such as plumbers and retailers. While Geberit's brand reputation for reliability underpins its pricing power, its relationships with intermediaries is equally important to withstand competition. Geberit's end customer lacks meaningful expertise in behind-the-wall sanitary products and instead places complete reliance on specialized installers such as plumbers. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of the intermediary.

There were no major surprises in wide-moat Geberit’s full-year results after it released provisional results in February. Our long-term thesis remains firmly intact despite a challenging fiscal 2022 and we expect that the group will be able to use its brand reliability and scale to extract market share gains from its smaller peers, despite weakness in residential construction activities. The group reported an EBITDA margin of 26.8%, falling short of its long-term target between 28% and 30% due to significant raw material inflation. We anticipate that the spillover effect of price increases already implemented and the decline in raw material prices, will offset volume pressure and help profitability return to normalized levels. We reiterate our CHF 505 fair value estimate and still see marginal upside from current levels.

The destocking of inventories from record levels at wholesalers was cited as the major reason behind wide-moat Geberit's disappointing fourth-quarter trading update. Organic revenue decreased 7% during the fourth quarter, which implies a decline in volumes of nearly 20% (somewhat offset by a 13% price increase). A weak print was largely anticipated, albeit not to this extent, as indicated by company-provided fourth-quarter consensus of 2.8% organic revenue growth. However, the share price is largely unchanged on Jan. 19. We believe the market is correctly adopting a long-term approach and awarding the business the benefit of the doubt, given its track record for market share growth from its mostly private and smaller competitors, resilient profitability, as well as its attractive cash yields (dividend plus share repurchases). We reiterate our CHF 505 fair value estimate and still see some upside from current levels.

Geberit is the largest player in the European bathroom sanitary sector with a full range of capabilities on both sides of the wall. Exceptional and stable profitability are due to its brand reputation and close relationships with the key decisionmakers for sanitary products, such as plumbers and retailers. While Geberit's brand reputation for reliability underpins its pricing power, its relationships with intermediaries is equally important to withstand competition. Geberit's end customer lacks meaningful expertise in behind-the-wall sanitary products and instead places complete reliance on specialized installers such as plumbers. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of the intermediary.

Wide-moat Geberit reported a disappointing set of third-quarter results which came in below company-compiled consensus. Destocking at wholesalers who had prebought inventories during previous quarters, in anticipation of significant price increases by Geberit, and the rapid increase in energy costs were the primary causes behind the weak print. However, we view these factors, which contributed to EBITDA declining 23% or 14% in constant currency, as temporary rather than structural and should not take detract from Geberit’s quality or investment case. In fact, our positive takeaway is that Geberit’s wide moat and strong pricing power remain firmly intact, evidenced by its ability to fully compensate 16% raw material inflation through higher prices. We maintain our CHF 505 fair value estimate and believe shares offer compelling upside for long-term investors.

Geberit’s strategy is aimed at reinforcing its competitive advantage, which supports the group’s exceptional returns on invested capital and high profitability. Geberit’s “push-pull” sales model has successfully created long-term brand loyalty by educating and turning key decision-makers (wholesalers and installers) for sanitary products into business partners. Behind-the-wall products place particular importance on brand reputation and relationships with key decision-makers that are encouraged to sell higher-value products, which makes it extremely difficult for competitors to penetrate Geberit’s existing core markets. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of the intermediary.

Wide-moat Geberit was unable to offset significant cost inflation during the first half of 2022, which saw EBITDA (in local currency) decline 4.6% year over year despite organic revenue growth of 11.3%. However, we don’t believe that one weak set of quarterly results detracts from the group’s investment case and business quality. We anticipate that the second-quarter EBITDA margin of 27% is likely to be a trough for the year, due to the delayed effect that previously announced price increases have on mitigating inflation, as well as further price increases that have been implemented for the second half, combined with a slight decline in raw material costs. While the market appears slightly disappointed by the second-quarter result, Geberit still managed to report best-in-class profitability, which we believe emphasizes its strong pricing power and brand reputation despite a challenging economic environment. We have made some adjustments to our forecasts but maintain our CHF 505 fair value estimate. We would require a slightly greater margin of safety before initiating a position.

Geberit’s strategy is aimed at reinforcing its competitive advantage, which supports the group’s exceptional returns on invested capital and high profitability. Geberit’s “push-pull” sales model has successfully created long-term brand loyalty by educating and turning key decision-makers (wholesalers and installers) for sanitary products into business partners. Behind-the-wall products place particular importance on brand reputation and relationships with key decision-makers that are encouraged to sell higher-value products, which makes it extremely difficult for competitors to penetrate Geberit’s existing core markets. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of the intermediary.

Wide-moat Geberit was able to implement larger price increases than usual to combat inflation without having a significant impact on demand in the first quarter, highlighting the group’s impressive pricing power. First-quarter revenue grew 13% year over year in local currency with an equal contribution from price and volume growth. However, price increases were not enough to combat significant raw material and energy inflation of 24% and 94%, respectively. The above-mentioned factors along with unfavorable currency movements led to a decrease in operating profit of 5% year over year. Further price increases have been implemented in April and an extraordinary price increase will be implemented in July as raw material inflation persists. Geberit’s ability to mitigate inflation does not come as a surprise to us and we reiterate our CHF 505 fair value estimate. Shares have fallen 30% year to date and are trading in fair value territory.

Geberit’s strategy is aimed at reinforcing its competitive advantage, which supports the group’s exceptional returns on invested capital and high profitability. Geberit’s “push-pull” sales model has successfully created long-term brand loyalty by educating and turning key decision-makers (wholesalers and installers) for sanitary products into business partners. Behind-the-wall products place particular importance on brand reputation and relationships with key-decision-makers that are incentivized to sell higher-value products, which makes it extremely difficult for competitors to penetrate Geberit’s existing core markets. Continuous product innovation and product range extension justify price increases, which are ultimately passed on to the end consumer, who lacks understanding on behind-the-wall sanitary matters and relies on support of their intermediary.

Having released preliminary results in January, there were no surprises to wide-moat Geberit’s full-year performance. Geberit’s strong brand reputation and product innovation allowed ordinary and extraordinary price increases to be implemented, protecting full-year profitability from 13% raw material inflation and markedly higher energy and freight costs. Further price increases have been implemented in January to help reduce the negative price-to-cost spread in the fourth quarter as well as a higher-than-normal price increase of 2.5% in April this year. Free cash flow grew 13%, of which 70% was returned to shareholders, a feature we expect to continue given the proposed 10% dividend increase to CHF 12.50 per share. The share price has converged with our fair value estimate of CHF 505, which we maintain.