Morningstar | How We Arrived at Our New FVE for GEA Group; Shares Attractive
Our lowered fair value estimate to EUR 38 from EUR 45 per share still implies substantial upside on the shares from current levels. We continue to find the shares as attractive. Below we step through how we arrived at our new fair value estimate.Our outlook on the demand for GEA's equipment remains largely unchanged, with a 4% revenue CAGR from 2021 onward. However, we expect a dip now in revenue in 2019 and return to growth in 2020, based on the new management's guidance. Our EBIT margin trajectory has changed with an expectation of a contraction of 100 basis points in 2019 to 8.2%, incorporating new management's guidance for added personnel and IT costs, the latter of which we think is related to resolving issues with ongoing software rollout. We still expect margin expansion but now forecast a midcycle EBIT margin of 11.1%, down about 90 basis points from our previous forecast midcycle forecast. We also expect the company to take more time to reach midcycle and so have extended our explicit forecast period to 10 years from five years. The business reaches our midcycle forecasts now by 2025 versus previously in 2022.
In the interim, we still expect margin improvement with the biggest uplift in 2020 and 2021 by 100 basis points each year, as we continue to believe the company has some low hanging fruit on cost cutting like reducing its manufacturing footprint to peer group size and lowering the portion of its cost base from high cost countries. Our midcycle EBIT margin of around 11% reflects this view and puts the company's long-term EBIT margin in line with peers like SPX Flow's food and beverage equipment business. GEA has achieved this level historically during multiple years. On an EBITDA basis, our new midcycle margin is 12.5%, 100 basis points below the low end of previous management's guidance range (which the new management has disowned), but still implying 170 basis points' improvement from 2018.
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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