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Morningstar | GEA’s Oversized Manufacturing Footprint and High Cost Base Offers Long-Term Margin Upside

GEA’s long history of innovation and market-leading share in several widely used food processing equipment lines attractively position the company to capture industry growth by enhancing product offerings, providing adherence to strict food safety standards, reducing resource consumption, and meeting increasing demand from a growing global population. The company's equipment helps food and beverage companies to differentiate their products. For example, major U.S. supermarket Kroger offers more than 700 yoghurt products with variations in style (Greek, Icelandic, traditional, or protein-enriched), fat content, and flavours. This generous assortment is made possible by the techniques for liquid separation, in which GEA is an expert. In emerging markets, we see an increasing push towards buying foreign-made food-processing equipment that adheres to the strictest safety standards to protect against foodborne illnesses, such as the 2008 infant formula scandal in China that led to the death of six infants and sickened another 300,000. GEA’s equipment is certified for FDA, EU, and local safety standards and has a long track record for safety with some of the largest food processors globally.Processing food consumes valuable resources, such as water and energy. Food-processing companies, especially public ones, are under increasing pressure to reduce resource consumption. GEA sells equipment that improves on resource efficiency of previous generations and also designs resource-efficient plants--for example, zero-water-consumption dairy processing plants that reuse water extracted from milk after it has been processed. Future improvements in its equipment and plant engineering efficiency will likely stimulate orders for upgrades, especially among companies reporting on sustainability gains.The European Food Information Council estimates that global food production will need to increase by 70% between 2015 and 2020 to meet demand from the increasing global population and expanding urbanisation. We think convenience foods, in which GEA’s process lines are integral, will play a large role in meeting this demand.