EUR 850.00 For Business Accounts Only

Morningstar | Geberit's Near-Term Outlook More Sluggish on Back of Damped Economic Outlook

We have lowered our near-term forecast for Geberit to 3% expected revenue growth from 4%. As we expect cost-cutting to accelerate, especially in areas like personnel, this change does not have a material effect on our CHF 330 fair value estimate. We maintain our narrow moat rating.

Geberit reported preliminary sales figures for the fourth quarter and full year that were in line with expectations, but European demand for the company's products was softer exiting 2018 than in the beginning of the year. The biggest factor for Geberit's product demand is the European renovation cycle. This market is highly correlated to real GDP (with an r-squared of 0.72 according to a study by the Hague Centre for Strategic Studies). In its Autumn Economic Forecast, the EU predicated 2018 GDP would grow by 2.1% and 2019 by 1.9%. However, economic indicators since then, including preliminary fourth-quarter figures, point to potentially lower growth. Should the renovation cycle decline with GDP, we think Geberit's products are more vulnerable as they reflect bathroom renovations, which we expect would be more tied to the outlook for housing prices, likely to look less exciting with lower GDP prospects, than say renovations for energy efficiency, which provide homeowners with cost savings.

Geberit reported 3% organic sales growth for the fourth quarter and full year. In the first half of the year, like-for-like growth was 4.3%. While some of the slower growth in Geberit's larger markets came from tough comparables, we believe a softening renovation cycle played a role as well.

We think the company will find more cost-cutting opportunities in a downturn. The employee base is an obvious target, given the doubling of its size while lowering EBIT per employee after the Sanitec merger.