Company Reports

We lift our fair value estimate by 7% for wide-moat GEA Group to EUR 48, following the announcement of a number of key growth and cost-out initiatives at its 2024 capital markets day. GEA discussed a range of growth opportunities that are expected to support earnings growth over the 2025-30 period, including innovative equipment and solutions to address the growing demand for alternative food proteins and that deliver energy efficiency for its customers. GEA also announced a range of cost-out initiatives that have the potential to widen its profit margins in coming years.

GEA Group is a leading supplier of highly engineered capital equipment and solutions to the food processing and pharmaceutical manufacturing industries. GEA’s reputation for innovation and safety positions the company to win equipment orders—particularly from customers who are sensitive to reputational risk from incidences of food contamination and those who wish to differentiate their product offerings.

We make no change to our EUR 45 fair value estimate with wide-moat GEA Group’s second-quarter 2024 offering resilient top-line growth and pleasing profit margin expansion amid otherwise tepid demand conditions. Order intake remained soft, declining 3.5% year on year on an organic basis amid still weak industrial output, particularly in Europe. Second-quarter order intake for the separation and flow and heating and refrigeration segments were bright spots amid the otherwise weak demand environment as new orders from food, pharmaceutical, and distribution and storage customer industries rebounded. While second-quarter orders tracked broadly in line with our full-year expectations, we’ve lowered our full-year order intake forecast by 3% to EUR 5.2 billion to account for currency headwinds, which we expect will offer a greater drag on order intake than we’d previously credited. GEA shares screen as undervalued, trading at a 12% discount to our unchanged valuation.

GEA Group is a leading supplier of highly engineered capital equipment and solutions to the food processing and pharmaceutical manufacturing industries. GEA’s reputation for innovation and safety positions the company to win equipment orders—particularly from customers who are sensitive to reputational risk from incidences of food contamination and those who wish to differentiate their product offerings.

Wide-moat GEA Group delivered an impressive first-quarter result that featured resilient top-line growth—amid a weakened demand environment for food manufacturing equipment—coupled with robust profit margin progression. As we'd expected, demand for food processing equipment remains weak in early 2024, leading GEA's first-quarter order intake to fall about 10% organically. The decline in new orders was relatively broad-based, with all divisions reporting weakened order intake, aside from the food and healthcare technologies division, which benefited from a large order from a pharmaceutical customer).

GEA’s fourth-quarter result provided us with little in the way of surprise, with the wide-moat capital equipment supplier delivering full-year EBITDA of EUR 774 million, up about 9% year on year and aligning with our expectations. Solid organic sales growth of about 4% and 60 basis points of EBITDA margin progression, to 14.4%, supported earnings growth in 2023. Nonetheless, new orders remained weak in the final quarter of 2023—with liquid & powder and food & healthcare technologies segments particularly soft—capping off a year of subdued demand with full-year order intake growing just 0.8% organically. While we expect consequent softening in earnings growth in 2024, GEA shares continue to screen as appealing and our long-term expectations for solid earnings growth remain unchanged.

GEA’s new order intake continues to underwhelm in late 2023, with the third-quarter organic order intake falling 1.7% year on year, and marking the second consecutive quarter of soft new orders for the wide-moat food and beverage equipment supplier. For context, year-to-date new orders have grown just 1.6% organically, comparing unfavorably with our long-term top-line revenue expectations of about 4.5%, and GEA’s medium-term annual revenue growth target of 4%-6%. Still, GEA’s soft new order intake chimes with the recent performance of a number of its peers—including wide-moat Alfa Laval and other European food processing players–that have reported a similar soft order intake in late 2023, citing lower spending on capital projects amid the present uncertain economic conditions. While we expect the present new order malaise to weigh on organic sales growth in 2024, our longer-term outlook for GEA remains unchanged as does our EUR 43 fair value estimate. GEA shares screen attractively, trading at a 21% discount to our unchanged valuation.

We make no change to our EUR 43 fair value estimate for GEA Group following a transfer of analyst coverage. We also maintain our wide moat rating, Medium Morningstar Uncertainty Rating, and Standard Morningstar Capital Allocation Rating for the leading supplier of highly engineered capital equipment and solutions to the food processing and pharmaceutical manufacturing industries. While GEA’s order intake in the second quarter of 2023 was a touch soft—new orders grew just 2.4% organically—our long-term expectations for robust earnings growth remain unchanged. Consequently, GEA shares screen attractively, trading at a 24% discount to our unchanged fair value estimate.

GEA Group is a leading supplier of highly engineered capital equipment and solutions to the food processing and pharmaceutical manufacturing industries. GEA’s reputation for innovation and safety positions the company to win equipment orders—particularly from customers who are sensitive to reputational risk from incidences of food contamination and those who wish to differentiate their product offerings.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. The company's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.

The quarter was a mixed bag for GEA as organic growth was 2.4%, below the 3%-4% rate we would expect its market to grow at on a midcycle level. The company performed well in other areas, however. Organic revenue grew at 9.4% with especially strong growth in Latin America and the chemical segment. Management confirmed it expects 2023 organic revenue growth above 8%. As we discussed earlier in the year, guidance looks achievable given the usually high degree of visibility that the company's high order backlog is providing for 2023 revenue. Order backlog rose 2.9% from the previous year, a continued strength for the company providing increased visibility for the second half of 2023 and early 2024. While the book-to-bill ratio fell to 1.03 from 1.1 a year ago, it remains above 1.0, indicating strong demand.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. The company's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.

Strong order growth and pricing supported GEA's nearly 9% organic revenue growth for 2022, well above the 3%-4% rate we would expect its market to grow at on a midcycle level. Notable 2022 revenue drivers included automated milking equipment, new food machinery (for alternative proteins), and service revenue. The business also saw several large orders during the year. Generally, this is a signal that the market is closer to peak cycle with larger orders contributing to a higher portion of the order book during peak times. For 2023, management expects organic revenue growth above 5%. Although this figure would also be above the average midcycle level, the guidance looks achievable given the usually high degree of visibility that the company's high order backlog is providing for 2023 revenue. Roughly three quarters of the 2023 expected machinery revenue is already in the order backlog. We maintain our wide moat rating. Shares are trading in line with our EUR 43 fair value estimate.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. The company's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.

GEA Group's third-quarter results were reassuringly solid with 10% organic sales growth and EBITDA margin up 50 basis points to 14.7%. However, orders were down just under 1% organically on a tough year-ago comparison. Even so, demand seems to be slowing with some potential projects in the pipeline perhaps having less chance of conversion to orders due to customer delays. Capital expenditure outlays are the first to come under budget scrutiny in a downturn. Therefore, we would expect orders to be soft during 2023 from potential macroeconomic headwinds. That doesn't change our long-term outlook for the company as food processing equipment serves a critical role in efficient food production. However, we have made adjustments to our forecasts. GEA is in an advantageous position coming into 2023 as it has a large backlog of orders that when executed will support revenue in 2023, even if orders slow down. Therefore, we forecast higher revenue growth in 2023 versus 2024 as we factor in a slowdown during 2023 orders hitting 2024 revenue. All that said, our fair value remains EUR 43 and we retain our wide moat rating.

Orders for farming technology equipment, as well as strength across most other end markets, fed GEA's group demand in the second quarter, with operating leverage and restructuring measures supporting the company's EBITDA before restructuring margin. Group book/bill remained above 1 times at 1.1, lower than 1.37 in the first quarter, but still indicating strong demand. Current favorable order demand drove 9% organic revenue, while EBITDA before restructuring margin came in 10 basis points lower than last year at 13.2%. We consider this a solid result considering inflationary pressures across industrials. Operating leverage, service revenue growth, and the company's efforts to rightsize its global manufacturing footprint were likely positive margin offsets to the cost increases. We maintain our wide moat rating. The shares offer attractive upside against our EUR 43 per-share fair value estimate.

GEA Group’s book-to-bill spiked to 1.37 times in the first quarter with orders exceeding company-provided consensus but supply chain bottlenecks holding back revenue to modestly below expectations. Importantly, the company’s EBITDA margin was up 90 basis points to 12.3%. Management continued to prove its credibility on profit flow-through from restructuring gains. We forecast long-term EBITDA margins just above 14% as we believe that the company’s equipment holds pricing power, which previous management was unable to leverage. GEA Group’s food manufacturing end markets are made of conservative buyers, and vendor track records on equipment performance and hygiene features create an asymmetric risk/rewards relationship in switching equipment suppliers. GEA has a long-standing track record as premium supplier to many of the world’s largest food manufacturing groups. We maintain our EUR 43 fair value estimate and wide moat rating. Shares look attractive at current levels.

Supply chain disruptions and a timing lag on price increases in line with input costs caused GEA Group's full-year 2021 to come in slightly below our expectations. Sales grew by 1.5% on a reported basis, below our 4.8% estimate. However, EBITDA was slightly ahead of our forecast with the 13.3% EBITDA margin beating our and the company provided consensus estimate. However, underlying demand was strong across all divisions. We expect the company to make up for that shortfall and meet our current 2022 EBITDA forecast. Our wide moat rating remains intact, and shares currently offer 13% upside relative to our EUR 43 fair value estimate.

Following GEA Group’s solid third-quarter results and recent capital markets day, we are increasing our fair value estimate to EUR 43 per share from EUR 35. We maintain our wide moat rating. Two key factors are behind our fair value estimate increase. The first is a 60-basis-point bump to our long-term EBITDA margin, to 15.1%. The second is a higher revenue growth forecast in the medium term, to 4% from 3%. The benefits of new management's decentralization strategy have been showing in more consistent top-line performance as well as margin expansion. Growth in small base-level orders, which are less than EUR 1 million, have been encouraging, particularly around the company’s moatiest segment, separation flow technologies. These smaller orders contribute more than half of the company's new orders, and smaller orders within the SFT division are roughly one fifth of the group. SFT small orders have been outgrowing total small order growth throughout 2021.

GEA Group has an established position as a leading supplier of separators and other food processing equipment, offering customers value by lower food contamination risk as well as lower resource consumption when running food processing lines. Its end markets are growing through global population growth and a focus on food safety and resource conservation. GEA's global brand recognition positions it well to win orders, particularly from customers being sensitive to reputational risk from incidences of food contamination.