Morningstar | GEA Group's Third Quarter in Line; Although With Some Signs of Potential for Margin Improvements
GEA Group reported third-quarter results with no great surprises as the company had already prereleased results. We retain our wide moat rating and EUR 45 fair value estimate. Today's results did bring more details including a recovery in margins on the equipment side, up to 14.4% from 8.6% in the first quarter, a large order backlog build up that should help margins going forward, but a still frustratingly high level of receivables.The EBIT margin remains well below midcycle levels at 9.4% in the third quarter, or about 100 basis points below midcycle level. However, we would expect some improvements in the coming quarters. Demand for the company's equipment has picked up nicely this year. Third-quarter orders were up organically nearly 11% in the third quarter, but revenue was up just 3%. With the gap between order and sales growth, the order backlog for the company is at the highest level since the start of 2015. That means the solutions business, where most of the backlog lies, should see a pick up in margin in the next few quarters from higher utilization rates. Another potential help for margins could be the company's efforts to increase pricing to counter foreign exchange and raw material price pressures, although the results so far seem mixed, especially where foreign exchange increases have been greater and local customers are unable to absorb the increase.
Aside from margin improvements, progress on other low hanging fruit that could increase cash flow remains slow. On the receivables side, the company has worked down part of the receivables but new orders with advances has masked some of that. Manufacturing footprint costs reductions have been slow; however, management alluded to progress on moving more of its manufacturing to lower cost countries, namely China, and that the new CEO, Stefan Klebert will be more focused on shrinking the manufacturing costs.
GEA Group focuses on the development and production of process technology and components for production methods. Co. segments include: GEA Food Solutions, which manufactures machinery for preparing, marinating, processing, cutting, and packaging meat, poultry, and other foods; GEA Farm Technologies, which manufacturers product solutions for milk production and livestock farming; GEA Mechanical Equipment, which concentrates in separators, decanters, valves, pumps, and homogenizers; GEA Process Engineering, which designs and develops of process solutions for the pharmaceutical, and chemical industries; and GEA Refrigeration Technologies, which concentrates in refrigeration technology.
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