Geberit Earnings: Shares Rise After Strong Profit Growth and Higher Guidance, but Still Appear Cheap

Geberit’s GEBN strong pricing power and wide moat were evident during the third quarter, which helped deliver a 13% increase in operating profits, despite declining construction activity in Europe. Year-over-year price increases of 6%, combined with declining raw material costs and the group’s relentless focus on productivity improvements supported a 340-basis-point EBIT margin improvement to 24.5%. We weren’t surprised that management raised its full-year EBITDA margin guidance by 0.5% to 29.5% at the midpoint and had viewed its previous guidance as conservative given the spillover impact from price increases already implemented and a tailwind from lower raw material costs. Shares climbed 10% on Nov. 2, but still appear undervalued compared with our CHF 510 fair value estimate, which we maintain.

Organic revenue declined 5% during the third quarter due to an 11% decline in sales volumes, which was partially offset by price increases. While it’s difficult to confirm if volumes have reached a trough, they are trending in a favorable direction compared with the 25% decline during the previous quarter and face a much easier comparable. Management has done a commendable job in maintaining the group’s best-in-class profitability despite volumes declining more significantly than during the global financial crisis. Management expects the tailwind of lower raw material costs to persist during the fourth quarter, which will support further margin expansion.