EUR 850.00 For Business Accounts Only

Morningstar | GEBN Updated Forecasts and Estimates from 15 Nov 2018

Geberit's third-quarter organic sales growth slowed to under 1% and the EBIT margin contracted 90 basis points year over year, a weaker performance relative to the first half driven by growth fatigue across a few markets, including some in Europe. Management reduced guidance for the full year, taking expected organic revenue growth down 100 basis points to 3%. (The reported figured will be higher due to currency effects.) We expect to adjust our near-term numbers down slightly but do not expect this to materially change our CHF 330 fair value estimate. We retain our narrow moat rating. We find the shares overvalued, with the market underestimating the tougher competitive landscape in the company's expansion markets, namely ceramics (bathroom installations) and underpenetrated European countries like France and the United Kingdom.

The shares traded down sharply on the results, having fared well for most of the year relative to European capital goods companies in our universe, which have seen weak share price performance since June as the market has been pricing in general softening demand. For Geberit and other companies we cover, we have been forecasting a slowdown in revenue growth in 2019 but not a decline, as might be experienced in a severe economic downtown. We continue to hold that view.

Geberit is not immune to the cycle, and these results and share price move are reflective of the natural growth slowdown after a couple of years of rebound in the housing market. The slowdown is not broad-based but still stretches to several markets, including a few European markets. Housing indicators such as residential permits or new-home sales saw flat or year-over-year declines in markets such as France, Austria, and the Netherlands, with growth fatigue settling in after two years of above-average growth. We think weaker growth is likely to continue in the next few quarters, particularly on tougher comparables.