Morgan Stanley analyst Chris Snyder reiterated an Equalweight rating and $27.00 price target on Gates Industrial Corp. (NYSE: GTES).

The analyst comments "GTES posted Q1 EBITDA of $177M, modestly below ~$179M expectations w/ downside led by softer organic growth – Q1 organic of down 3% came in worse the guided 2% decline as ERP implementation + Days headwind served as a ~600 bps drag in the Q (vs ~500 bps guide). While the Q1 print is worse than MS positive preview which called for organic upside (link), our call for Q2 organic upside is showing through w/ +3.5% midpoint guide above Cons +2.7%. The sharply positive rate of change into Q2 organic is not as difficult as it reads w/ the Q2 comp ~200 bps easier and swing factor going from Q1 ERP headwinds to Q2 potential ERP catch-up. Similar to broader short-cycle industrials, GTES saw positive rate of change on demand during Q1 – while the company touted early Q1 strength back in early Feb on the Q2 CC, commentary in today’s release signal further improvement into March (discussed below). GTES reiterated its FY’26 guide and for Q2 is pegging sales $905 - $945M (vs Cons $917M) on 3.5% organic growth (vs Cons 2.7%) with EBITDA margins down 30 bps on ERP impact (vs Cons down 40 bps). The guide nets to Q2 midpoint EBTIDA of $205M, a tick above Cons $203M. More Signs of Q1 Short-Cycle Order Inflation, Question is on Underlying Drivers: GTES noted that Power Transmission “broadly accelerated in March” and Fluid Power saw “strong order intake exiting Q1”. While we turned constructive on US short-cycle in our 2026 outlook (Layering in Cyclical Torque), called for more durable than feared trends during trough March sentiment (link) and certainly believe activity is improving, we do believe Q1 order strength is overstating the turn on channel pull forward (link) – a tailwind to Q2 organic broadly that turns headwind into 2H. While the dynamic would broadly impact our US multi-industry coverage, we believe the best performing equities into a period of supply chain uncertainty are simply those backed by improving end markets which includes GTES - this both limits the magnitude of potential 2H destock and provides pricing power to offset rising cost inflation. GTES Buying Timken Belts Business: Timken announced it is agreed to sell its Belts business to Gates w/ deal expected to close in Q3’26. Timken Belts business has a broad suite of products across Industrial, Commercial and Consumer applications. Timken said the divesture is accretive to Industrial Motion segment margins which implies mid-teens or lower. This is dilutive to GTES low 20% EBITDA margins but would expect material synergy opportunity given business overlap. Reaction: We would expect a muted to modestly negative reaction for GTES shares w/ Q1 organic growth missing vs expectations of a beat on broader short-cycle improvement trends. With that said, atleast half of the Q1 organic miss vs buyside bogeys came from transitory ERP + Days headwind … and when combined with positive Q1 order momentum and Q2 organic acceleration / upside, we would any downside pressure to come through muted & short-lived."

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Shares of Gates Industrial Corp. closed at $25.61 yesterday.