Gates Industrial Corporation plc (GTES): what the price requires

At today's price, Gates Industrial Corporation plc (GTES) is priced for +18.0% growth. boothcheck doesn't publish a fair value or a price target; it shows what the price assumes, so you can judge whether that bar is too high.

Generated: 2026-07-19 · Source: https://boothcheck.com/report/GTES

Headline

FieldValue
TickerGTES
CompanyGates Industrial Corporation plc
Current price$26.09/sh
CompositionPower Transmission 62% / Fluid Power 38%

What The Price Requires (Inversion)

The assumption today's price embeds, recovered by inverting the valuation.

FieldValue
Inversion basiswhole-company
Operating margin needed12.5%
Operating margin today13.6%
Margin compression implied-1.1pp
Implied growth18.0%
Multiple paid18x operating income

The operating-margin requirement is derived from the framework's value band at year 12, a separately labeled basis from the headline growth/duration solve.

Solve inputs: computed at a 10.1% cost of capital with 4% terminal growth over a 5-year stage; each 1pp of cost of capital moves the implied operating-profit growth ~6.6pp.

How unusual the bet is: within-range

ReferenceValue
vs own history+0.48σ
cohort percentile (of 225 peers)32
sustained it ~5 years at this level40%
implied end-window share0%

Valuation X-Ray

The price is justified by relative-multiple and growth-DCF; asset-based/earnings-power land below the price.

How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.

FamilyMedian price/FVModelsReads
Asset2.80x5expensive
Earnings2.12x5expensive
Relative1.02x5expensive
Growth1.08x3expensive

Families that justify the price: Relative, Growth Families that call it expensive: Asset, Earnings

The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 7.2%); the inversion above states its own rate.

Per-Model Detail (n=18)

ModelFamilyFVPrice/FVApplicableMethodology
DCF Perpetual GrowthGrowth$24.051.08xyesFCF base $0.4B, growth 2% (input: historical growth), terminal g 1.6%, WACC 7.2%, 5yr projection
DCF Exit MultipleGrowth$25.561.02xyesExit EV/EBITDA: 10.2x / 12.2x / 14.2x (bear / base = today's held flat / bull), 5yr
Relative ValuationRelative$21.641.21xyesP/E 18x (static sector reference · 2026-04), scenarios: 15.3x / 18.0x / 20.7x (bear / base = reference held flat / bull), EV/EBITDA 12x
Simple DDMGrowth——no—
Two-Stage DDMGrowth——no—
Simple Excess ReturnAsset$10.482.49xyesBV/sh $13.11, ROE (TTM) 7.4%, ke 9.3%
Two-Stage Excess ReturnAsset$9.332.80xyes5yr excess ROE then converge to ke=9.3%
Discounted Future Market CapGrowth$17.781.47xyesRev $3.4B, growth 2% (input: historical growth; tapered), Terminal P/S: 1.6x / 1.9x / 2.2x (bear / base = today's held flat / bull, cap 8x)
Peter Lynch Fair ValueRelative$18.841.38xyesEPS $0.95, growth 20% (input: historical EPS growth), PEG=1.36 (Fair)
Margin TrajectoryGrowth——no—
Earnings Power ValueEarnings$15.701.66xyesNormalized EBIT (5y avg op income, one-time charges added back) $0.47B × (1−15%) / WACC 7.2% → EPV (no growth)
Residual IncomeAsset$9.162.85xyesBV $13.11 + 5yr PV of (ROE (TTM) 7.4% − Kₑ 9.3%) × BV; BV grows 4.8%/yr
Graham NumberAsset$16.741.56xyes√(22.5 × EPS $0.95 × BVPS $13.11) — Graham's conservative floor
EV/EBITDA RelativeRelative$25.461.02xyesEBITDA $0.67B × sector EV/EBITDA 12.0x
FCF YieldEarnings$12.302.12xyesFCF $428.6M / Kₑ 9.3% — zero-growth perpetuity
SBC-Adj FCF YieldEarnings$11.152.34xyesSBC-adj FCF $0.40B (FCF $0.43B − SBC $0.03B) capitalized at Kₑ
Ben Graham FormulaEarnings$30.650.85xyesEPS $0.95 × (8.5 + 2×15.0%) × (4.4 / 5.3%)
ROIC-Justified P/BAsset$3.527.41xyesBV $13.11 × (ROIC 1.9% / WACC 7.2%)
P/Sales SectorRelative$33.540.78xyesRevenue $3.45B × sector P/S 2.5x
PEG Fair ValueRelative$28.260.92xyesEPS $0.95 × (PEG 1.5 × growth 19.8% (input: historical EPS growth)) → PE 29.8x
Earnings YieldEarnings$10.272.54xyesEPS $0.95 / required return 9.3% (Rf 4.3% + ERP 5.0%)
Funds From Operations MultipleRelative——no—
Clinical Phase NPVGrowth——no—
MertonAsset——no—
V5 Mechanical———no—

Solvency

FieldValue
Net debt$1.4b
Net debt / NOPAT (after-tax)3.63x
Net debt / operating income (pre-tax)3.10x
Interest coverage3.8x
Share count CAGR (buyback)-3.5%
Burning cashno

Bullet Takeaways

Bull Case

Gates is best understood through the lens of what an aftermarket industrial actually sells, which is not equipment but the parts that wear out. Belts and hoses fail on a schedule set by use, not by the capital-spending cycle, and they get replaced because a stopped machine or a stranded vehicle costs far more than the part. That is why the revenue base is sturdier than the industrial label suggests: the Power Transmission segment, "approximately 62% of our total net sales for Fiscal 2025," and the Fluid Power segment of "hoses, tubing and fittings designed to convey hydraulic fluid at high pressures" both carry a large replacement component that recurs regardless of whether customers are buying new machines. A maker of consumable parts with a specified, branded position in the repair channel earns its margin from being the part the mechanic reaches for, not from winning the next equipment bid.

That structure shows up in the margin profile and the cash conversion. Management guides full-year 2026 to free-cash-flow conversion above 90% of adjusted earnings, with adjusted EBITDA in the $775 to $835 million range. High and consistent cash conversion is the signature of a business that does not need heavy reinvestment to keep selling, and Gates is using that cash on its own shares: the share count has been falling at a mid-single-digit annual pace, which is direct evidence of buyback deployment rather than a promise of it.

The near-term setup adds a recovery angle. The first quarter was depressed by a European ERP system transition and fewer working days, which together represented roughly a 600 basis point headwind to core sales. These are self-inflicted and temporary rather than demand-driven, and management reiterated full-year guidance and pointed to margins approaching the mid-23% range in the second half. If the ERP disruption fades as expected, the comparison base in the back half flatters the growth, and the aftermarket demand that the disruption masked comes back through cleanly. The bull case is a steady consumables franchise temporarily understating itself.

Bear Case

The most useful way into the bear case is to ask which valuation methods are doing the work, because they disagree sharply and the conservative ones are usually the more honest read. Asset value and earnings power both place Gates well below today's price, with the asset lens reading the price at roughly three times where book-based methods land and the earnings-power lens at more than double. Only the peer-multiple and forward-growth methods reach the price, and they get there by crediting future growth the static methods refuse to assume. When the methods grounded in what a company has already earned say expensive and only the ones extrapolating forward say fair, the burden of proof sits on the growth, and Gates has set itself a high bar: the price embeds roughly 21% annual operating-profit growth for five years, a pace only about 36% of comparable fast-growers sustained even five years.

The problem is that the underlying business is cyclical, and the recent record shows the cycle biting. The 10-K reports that "off-highway and diversified industrial end markets drove most of the decline, with core sales that decreased by 12.3% and 3.5%, respectively, during Fiscal 2025." Off-highway markets, construction and agriculture equipment among them, fell double digits, and the filing is candid that regional "volatility in our regions could result in significant or frequent fluctuations or declines in our sales and operating income." A consumables franchise smooths the cycle but does not escape it; when end-market machines run fewer hours, even replacement demand softens. The first quarter's core sales decline, even after stripping the ERP and working-day effects, shows demand is not yet inflecting upward, which is uncomfortable for a price that needs sustained high growth.

Leverage and input costs frame the downside. Net debt of roughly $1.4 billion runs at about three times operating income with interest covered only around 3.6 times, so the balance sheet has less slack than the cash-conversion story implies, and a cyclical downturn would pressure both the earnings and the coverage at once. On costs, the 10-K notes the company "strive[s] to pass along such commodity price increases to customers to avoid profit margin erosion," which is an aspiration, not a guarantee: when raw materials rise faster than price increases can be implemented, the margin gives. The bear case is not that Gates is a bad business; it is that a good, cyclical, moderately levered consumables maker is being priced as a secular grower, and the conservative methods are telling the truer story.

Valuation

Gates trades at about 19 times company-wide operating income, and inverting that price says the market is paying for roughly 21% annual operating-profit growth over five years. The current operating margin near 13% is close to what the price implies it needs, so the bet is not about margin expansion; it is about the growth rate, and specifically about sustaining a high rate for long enough. Against the company's own recent record the near-term pace is within reach, but the historical base rate is the sobering part: only about a third of comparable fast-growers held that pace for even five years.

The families of method split cleanly, and the split is the signal. Asset value and earnings power read the price as expensive, the asset lens by roughly three times and earnings power by more than double, because both anchor on what Gates has actually earned and owned. Peer multiples land just above the price, essentially in line with comparable industrial-machinery names, and only the forward-growth method fully reaches it. So this is not a stock the value methods support; it is one that requires the growth assumption to hold, with the static lenses structurally unable to credit the future the price is paying for. The peer comparison is the most defensible anchor here, and it says Gates is priced about in line with its industrial cohort rather than at a discount, which leaves little margin if growth disappoints.

Solvency bounds the case without resolving it. Net debt of roughly $1.4 billion at about three times operating income, with interest coverage near 3.6 times, is manageable in a steady environment but tightens in a downturn, and it sits beneath an equity that is already priced for growth. The offsetting positive is the cash machine: management guides to free-cash-flow conversion above 90%, and the falling share count shows that cash going back to holders. A buyer at this price is underwriting a cyclical consumables business to compound near the top of its range for years, paying a peer-level multiple for it, and relying on the cash conversion and buybacks to carry the return if the growth proves more ordinary than the price assumes.

Catalysts

Gates opened 2026 with a quarter that looked weak on the surface for reasons largely outside demand. Net sales were $851.1 million, up 0.4% year over year but down 2.9% on a core basis, with a European ERP system transition and fewer working days representing roughly a 600 basis point headwind to core sales. Adjusted EBITDA was $177.4 million at a 20.8% margin, down about 130 basis points, and the company missed revenue estimates, which pressured the stock.

The forward guidance is the catalyst to weigh, because management held it despite the soft start. Full-year 2026 guidance was reiterated at core sales growth of 1% to 4%, adjusted EBITDA of $775 to $835 million, adjusted EPS of $1.52 to $1.68, and free-cash-flow conversion above 90%. For the second quarter, management guided revenue of $905 to $945 million with core growth around 3.5% at the midpoint, and pointed to margins approaching the mid-23% range in the back half as the ERP and footprint-optimization headwinds ease. The reiterated outlook is a bet that the first-quarter softness was timing, not demand.

The variables that decide the year are the pace of the ERP recovery, the trajectory of off-highway and diversified industrial end markets that drove the fiscal 2025 declines, and raw-material costs against the company's ability to pass them through. The next two quarterly prints will show whether core growth reaccelerates toward the guided range and whether the second-half margin step-up arrives as promised, which is what the current valuation is counting on.

Peer Cohorts (Per Segment, With Filing Citations)

Power Transmission (reported)

Fluid Power (reported)

Methodology Note

Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.

Sources

Gates Q1 2026 earnings release

View the full interactive GTES report on boothcheck