Geberit Stock: Temporary Headwinds, A Rare Buying Opportunity

The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they’re on the operating table. – Warren Buffett

Geberit (OTCPK:GBERY) is a great company that is experiencing what we believe to be temporary headwinds. It is a leading provider of bathroom and plumbing solutions, with a very strong brand that is a key competitive advantage. The company has built a reputation for producing high-quality, reliable, sustainable, and innovative products.

As a result of the headwinds the company is experiencing, its shares have lost ~27% in the past year, but it looks like they are starting to recover.

Headwinds include the rising interest rates environment that is cooling-off the construction market, and abnormally high energy prices that are affecting margins. As can be seen in the slide below that shares the company’s key figures for Q3 2022, net sales growth was negative 7.5% in Swiss Francs, and 1.6% in constant currency. As a result, earnings per share in the quarter declined a massive 26%.

The company was significantly impacted by energy prices, which ‘exploded’ in Q3 from already very elevated levels. Geberit consumes significant energy in its productions process, and as a result this has had a very negative impact on its profit margins.

Financials

Historically, Geberit has had very high and stable profit margins, with its operating margin averaging ~23% over the past ten years.

In the most recent quarter, however, Geberit reported a significant decrease in its profit margins due to negative volumes growth and the extremely high energy prices. Despite this decrease, the company remains solidly profitable and continues to generate significant free cash flow.

One more interesting statistic that reflects the quality of the business is its ten-year average return on capital employed of ~24%, which is extremely high and allows the company to compound retained earnings in a very significant way.

Growth

Revenue has grown meaningfully in the past ten years, but this growth has been very cyclical. The average annual year over year revenue growth has been roughly 7%, while earnings have increased at a slightly more rapid pace of ~9.6%. This is not a hyper-growth company obviously, but these are very solid numbers, and we believe this level of growth is very sustainable.

Balance Sheet

While the Geberit Group’s financial situation remains very solid, the lower free cash-flow generation and increased speed of their share buyback program led to a planned increase in net debt to 831 million Swiss Franc at the end of the most recent quarter. The company’s financial debt to EBITDA remains at a very reasonable level.

ESG

Another strength of Geberit is its commitment to sustainability and energy efficiency. The company offers a range of products that are designed to conserve water and energy, which helps to reduce the environmental impact of its products. Geberit has repeatedly been awarded the highest rating of the EcoVadis platform for its sustainability management, and has a low-risk rating on Sustainalytics as well.

Valuation

In the past ten year buying shares around a 4.5x EV/Revenues multiple has worked out well for investors. Shares were at those levels recently, and are currently just slightly higher. We believe current prices, while slightly less attractive than a few months ago, still offer a good buying opportunity. It is worth noting that Geberit shares usually trade at a high valuation, and buying opportunities are rare.

The ten-year average price/earnings ratio is ~28x, but currently shares can be purchased around a 22x multiple.

The net common payout yield, which combines the dividend yield and the buyback yield, is currently quite high at ~5.8%. This is significantly higher than the ten-year average. It appears that the company believes this is a great time to buy back shares, which is another reason why we believe current prices to be an opportunity.

Risks

The main risks the company is currently facing are macroeconomic uncertainty resulting from high inflation and a rising interest rate environment that is cooling-off the construction industry. The company is also facing extremely high energy costs that are weakening its profit margins. Despite these headwinds, the company has so far been able to remain profitable, but there is a risk that the situation could get worse.

Conclusion

Geberit is a great company that is currently experiencing temporary headwinds due to rising interest rates, a cooling-off construction market, and abnormally high energy prices. This has negatively impacted net sales growth and earnings per share. Despite these challenges, the company remains profitable and continues to generate significant free cash flow. Still, there are risks to consider, including significant macroeconomic uncertainty. While the company’s shares have lost ~27% in the past year, they appear to be recovering, and we believe current prices offer a rare buying opportunity. We are therefore starting coverage with a ‘Buy’ rating.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.