Over the last six months, Gates Industrial Corporation’s shares have sunk to $21.75, producing a disappointing 9% loss - a stark contrast to the S&P 500’s 9.9% gain. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

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Why Is Gates Industrial Corporation Not Exciting?

Even though the stock has become cheaper, we don't have much confidence in Gates Industrial Corporation. Here are three reasons why GTES doesn't excite us and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

We can better understand Engineered Components and Systems companies by analyzing their organic revenue. This metric gives visibility into Gates Industrial Corporation’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Gates Industrial Corporation’s organic revenue averaged 2% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Gates Industrial Corporation might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Gates Industrial Corporation’s revenue to rise by 3.6%. Although this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Gates Industrial Corporation historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

Final Judgment

Gates Industrial Corporation isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 14× forward P/E (or $21.75 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of Gates Industrial Corporation

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