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Power transmission and fluid power solutions provider Gates Corporation (NYSE:GTES) missed analysts' expectations in Q2 CY2024, with revenue down 5.4% year on year to $885.5 million. It made a non-GAAP profit of $0.36 per share, down from its profit of $0.36 per share in the same quarter last year.
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Gates Industrial Corporation (GTES) Q2 CY2024 Highlights:
- Revenue: $885.5 million vs analyst estimates of $893 million (small miss)
- EPS (non-GAAP): $0.36 vs analyst expectations of $0.36 (in line)
- EPS (non-GAAP) Guidance for the full year is $1.32 at the midpoint, missing analysts' estimates by 4.5%
- EBITDA Guidance for the full year is $755 million at the midpoint, below analyst estimates of $780.3 million
- Gross Margin (GAAP): 40.4%, up from 37.7% in the same quarter last year
- Free Cash Flow of $71.9 million is up from -$37 million in the previous quarter
- Organic Revenue fell 4% year on year (3.9% in the same quarter last year)
- Market Capitalization: $4.63 billion
Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE:GTES) offers power transmission and fluid transfer equipment for various industries.
Engineered Components and SystemsEngineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales GrowthReviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Over the last five years, Gates Industrial Corporation grew its sales at a weak 1.5% compounded annual growth rate. This shows it failed to expand in any major way and is a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Gates Industrial Corporation's recent history shows its demand slowed as its revenue was flat over the last two years.
We can dig further into the company's sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Gates Industrial Corporation's organic revenue averaged 2.4% year-on-year growth. Because this number is better than its normal revenue growth, we can see that some mixture of divestitures and foreign exchange rates dampened its headline performance.
This quarter, Gates Industrial Corporation missed Wall Street's estimates and reported a rather uninspiring 5.4% year-on-year revenue decline, generating $885.5 million of revenue. Looking ahead, Wall Street expects sales to grow 4.2% over the next 12 months, an acceleration from this quarter.
Operating MarginOperating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.
Gates Industrial Corporation has managed its expenses well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 11.7%. This result isn't surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Gates Industrial Corporation's annual operating margin rose by 6.8 percentage points over the last five years, showing its efficiency has meaningfully improved.
This quarter, Gates Industrial Corporation generated an operating profit margin of 15.4%, up 1.6 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
EPSAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Gates Industrial Corporation's EPS grew at a weak 3.4% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.5% annualized revenue growth and tells us the company became more profitable as it expanded.
We can take a deeper look into Gates Industrial Corporation's earnings to better understand the drivers of its performance. As we mentioned earlier, Gates Industrial Corporation's operating margin expanded by 6.8 percentage points over the last five years. On top of that, its share count shrank by 9.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Gates Industrial Corporation, its two-year annual EPS growth of 8.8% was higher than its five-year trend. Accelerating earnings growth is almost always an encouraging data point.
In Q2, Gates Industrial Corporation reported EPS at $0.36, in line with the same quarter last year. This print was close to analysts' estimates. Over the next 12 months, Wall Street expects Gates Industrial Corporation to grow its earnings. Analysts are projecting its EPS of $1.42 in the last year to climb by 9.6% to $1.55.
Key Takeaways from Gates Industrial Corporation's Q2 Results We struggled to find many strong positives in these results. Its revenue unfortunately missed and its EBITDA guidance for the full year fell short of Wall Street's estimates. Overall, this was a mediocre quarter for Gates Industrial Corporation. The stock remained flat at $17.55 immediately following the results.
