Saturday 7 December 2013

Analysis of Gea Group

A German supplier of process technology

Company: Gea Group

Business: A German supplier of process technology and components for the food and energy industry. The group is divided into six segments: GEA Food Solutions (produce machines for the preparation and packaging of food), GEA Farm Technologies (solutions for animal hygiene and efficient milk production), GEA Heat Exchangers (from air conditioners to cooling towers), GEA Mechanical Equipment (valves, pumps, separators etc.), GEA Process Engineering (design solutions for dairy, food, chemical & pharmaceutical industries) and finally GEA Refrigeration Technologies (designing installing and servicing industrial refrigeration systems). Almost 60% of the revenue comes from the Heat Exchangers and the Process Engineering.

Active: They are active in over 50 countries world wide and especially in all the growth region. Interesting is that over 80% of the revenue comes from outside Germany today.

P/E: 20.0

contrarian values of P/E, P/B, ROE as well as dividend
The P/E of Gea Group is as all of you know by now too high for me with 20.0 and the P/B is also over the top with 2.9 which leads to that Graham would shake his head in discomfort. Their earnings to sales are pretty ok with 5% and the ROE is acceptable with almost 15%. The book to debt I find a little bit too low with a ratio of 0.5. In the last five years they have had 2% growth which surprise me because if it would have been mainly Germany and Europe then I would say that would a little bit better than inflation but since they claim to be in the growth markets and 80% outside Germany I would have liked to see a better growth. Anyway this gives them a motivated P/E of 10 to 13 which means that today I consider them to be overvalued on the stock market. When it comes to research and development they are spending 27% of their earnings to make sure that they will not loose their grip of the market and it is a fully acceptable %-age. They pay a tiny dividend of 1.7% which represents almost 34% of their earnings so it should be no problem for them to keep that up.

Conclusion: Yet again one of those engineering and machine companies that Germany is famous for. This one is today both according to me and Graham overvalued on the market and is therefore of no interest to step into.

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