$13.10
$23.30
bear $13.10
base $18.80
bull $23.30
margin of safety $12.00
market price* $25.83
Gates makes engineered belts and hoses. Power transmission (elastomer drive belts and related components that transfer power in vehicles and machinery) was 62% of 2025 sales at $2,147.1 million. Fluid power (hoses and related products) was 38% at $1,296.1 million. About 68% of sales go through aftermarket channels, meaning replacement parts for equipment already in use, and 32% to original equipment makers. In North America and Europe, Middle East and Africa, about 73% of sales come from the aftermarket. Because a worn belt or hose has to be replaced for the equipment to keep running, the aftermarket portion has been the steadier part of the business. Aftermarket sales were $2,298.2 million in 2023, $2,303.0 million in 2024 and $2,353.8 million in 2025. Original-equipment sales fell over the same period, most sharply in fluid power (from $470.0 million in 2023 to $363.7 million in 2025). About 10% of sales are booked in Greater China. How we measure earnings. We start from cash flow from operations, remove the swings in receivables, inventory, payables, taxes payable and other working capital, subtract share-based pay as a real cost, and subtract the capital spending needed to maintain the business. We counted both purchases of plant and equipment and purchases of intangible assets (which rose from $10.2 million in 2023 to $40.7 million in 2025, alongside capitalized software growing from $138.2 million to $184.2 million on the balance sheet) as capital spending, because this spending recurs. Only a small growth-related share of spending was excluded, in years when sales rose. Non-cash charges, including amortization of acquired customer relationships (carried at $637.6 million net at the end of 2025), do not reduce these earnings. We tested whether those relationships are actually wearing away and found no sign of it: aftermarket sales rose in both 2024 and 2025. Interest is already paid out of the cash flow used here, so debt is not subtracted a second time. The resulting owner earnings were about $192 million in 2019, $216 million in 2020, $415 million in 2021, $294 million in 2022, $308 million in 2023, $270 million in 2024 and $317 million in 2025. We use the median of these seven years, $294 million, because they include the low results of 2019 and 2020, the peak of 2021 and the softer industrial sales of 2023 to 2025, so the figure is not set by one part of the cycle. Spread across the 260.5 million diluted shares of 2025, this is about $1.13 per share. Gates has repurchased shares in each year from 2021 through 2025, and the diluted count fell from 291.6 million in 2019 to 260.5 million in 2025, about 11% lower, so we use the current count. Owner earnings rose about 17% in 2025, but we do not build that in: the base case starts at the $294 million median, which is below the 2025 result. The first half of 2026 gives no reason to move the level. Sales were $1,792.7 million against $1,731.3 million a year earlier, up about 3.5%, and cash from operations was $108.8 million against $110.3 million. Base case, $18.8 per share. Owner earnings stay at $294 million a year and continue at that level. The named reason is the replacement-driven aftermarket, which is 68% of sales and grew while industrial and original-equipment sales weakened in 2023 to 2025. We give no credit for growth. Pricing added roughly $65 million to 2025 sales but was offset by lower volumes, and volume recovery, new products and share gains are not secured. The base case also gives no credit for buybacks, since repurchases at market prices do not by themselves add to what the business is worth. Bear case, $13.1 per share. Owner earnings drop to about $205 million a year, the level of the weakest years in the record (2019 and 2020, about $192 million and $216 million), and stay there. The risks behind this are in the filings. Fluid power original-equipment sales are already down about 23% in two years. Power transmission automotive sales in Greater China and Europe, Middle East and Africa fell 5.4% and 3.0% in 2025. Gates says tariffs could hurt its margins more than competitors that operate in countries with lower tariffs. It also carries $2,240.1 million of debt, including $500.0 million of 6.875% senior notes due July 1, 2029 and $456.3 million of term loans due November 16, 2029, which must be refinanced within a few years. Interest expense was $125.9 million in 2025. Bull case, $23.3 per share. Owner earnings start at the 2025 level of about $317 million and grow 1.8% a year for ten years, the rate at which sales grew between 2019 and 2025, then stay flat. This is the outcome if the company's own levers execute. Examples are the automotive aftermarket expansion, where automotive channel sales in fluid power grew 8.4% in 2025 and Gates broadened its Timing Chain Kits program that year, and personal mobility, which grew 28.7% in power transmission in 2025. We do not assume anything beyond the historical sales growth rate. What would make this wrong. If the aftermarket, the steadiest part of the business, starts shrinking, the base case is too high. Debt of $2,240.1 million is large relative to owner earnings of $294 million, and a refinancing on worse terms would reduce those earnings. We did not investigate the reason for the large rise in first-half 2026 net income ($230.6 million against $118.5 million), because it does not enter our earnings level. This is our first analysis of Gates. The margin-of-safety price of $12.0 sits below the bear case. It reflects that this is a cyclical industrial business with meaningful debt and that earnings have varied from about $192 million to $415 million over seven years.