Investing.com -- Shares of Geberit (SIX:GEBN), the Swiss-based sanitary technology company, rose on Friday after Goldman Sachs upgraded its rating to "buy" from "neutral."
At 6:28 am (1028 GMT), Geberit was trading 1.2% up at CHF 530.80.
This revision in rating comes amid a challenging performance year-to-date, with Geberit underperforming compared to peers due to its significant exposure to the construction market, particularly in Germany.
As per Goldman Sachs analysts, Geberit is now poised to benefit from several favorable developments in the European construction sector and broader economic conditions.
Goldman Sachs notes that Geberit, being heavily reliant on European construction markets for about 90% of its revenue, is positioned to take advantage of the early signs of recovery in the sector.
The brokerage flagged that construction permits and other leading indicators show an inflection point, suggesting a rebound in demand.
As a key supplier of piping and installation systems, Geberit tends to benefit early in the construction cycle, with distributor orders usually preceding actual installation by a few months.
Moreover, Goldman Sachs analysts forecast potential upside for Geberit’s margins in the near term, driven by favorable raw material and energy costs.
The brokerage introduced a new "Raw Materials Index," which suggests continued tailwinds for materials such as plastics and metals that Geberit uses extensively.
These cost advantages are expected to bolster the company’s earnings through at least the first quarter of 2025. The analysts expect that these material savings could lead to a margin improvement of up to 250 basis points in the coming quarters, exceeding the company's guidance.
Goldman Sachs also pointed to Geberit’s strong market position and pricing power across its key European markets. This pricing strength is expected to support a resumption of price increases in 2025, helping the company offset wage inflation and other cost pressures.
In light of these factors, the analysts project that Geberit will outperform market expectations on EBITDA margins in both 2024 and 2025.
Geberit’s stock is further buoyed by its status as one of the top beneficiaries of anticipated rate cuts in Europe.
Goldman Sachs analysts have flagged that Geberit has historically seen a positive impact on its valuation during periods of declining interest rates, largely due to its high cash return to shareholders through dividends and buybacks.
With the potential for further monetary easing in Europe, the company’s stock is expected to benefit from increased investor interest.
In line with these favorable conditions, Goldman Sachs raised its 12-month price target for Geberit to CHF 598, representing a 14% upside from current levels.
Analysts also see the potential for further upgrades to the company’s margin guidance when Geberit reports its third-quarter results on October 31st.
However, risks remain, including the possibility of a slower-than-expected recovery in the European construction sector and unforeseen increases in raw material prices.