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Investing.com -- Citi Research has downgraded GEA Group (ETR:G1AG) to "neutral" from "buy," citing concerns over fading margin tailwinds and a more balanced risk-reward profile following a 40% outperformance in the past year, in a note dated Monday.
Analysts at Citi acknowledged the progress GEA has made in profitability since 2019, noting a six-percentage-point improvement in EBITDA margin, which is expected to reach 16% in 2025.
However, they flagged that much of the recent gross margin gains appear to be driven by favorable mix effects, which are not expected to persist beyond the second quarter.
Service and new machine sales margins both showed improvement in the first quarter of 2025, according to the company’s recent earnings call.
However, Citi analysts said the jump in the higher-margin service segment coincided with a step-up in gross margin, a development they described as “unsustainable” as the company begins to deliver on its increased backlog. The book-to-bill ratio improved in the fourth quarter of 2024.
Citi also pointed to the company’s ongoing ERP investments, which they said could pressure margins in the second half of the year.
While the product mix is expected to remain positive in the second quarter, the benefit is forecast to decline in the second half.
Long-term margin improvements remain intact, according to Citi, but the firm now sees the stock as fairly valued. GEA is trading at over 14x 2025 EV/EBITA and 12.5x on 2026 estimates, a level analysts say reflects its current fundamentals unless it continues to outperform on growth and margin, a scenario they view as unlikely due to fading mix tailwinds.
Citi said the company’s 2030 target of an 18% EBITDA margin is credible, but noted that further gains will need to come from general and administrative cost improvements rather than cost of goods sold efficiencies. These G&A improvements are expected to materialize later in the forecast period.
The brokerage raised its price target for GEA to €59 from €50.80, citing a roll-forward in its valuation to 2026 and a slightly higher long-term margin outlook in its discounted cash flow model.
Despite this, Citi pointed out that even if the company achieves its 2030 targets, the implied fair value of €65 per share offers only 12% upside from current levels, which it considers limited following the stock’s recent rally.
On growth, Citi analysts said GEA has underperformed the sector over the past decade. Although growth has improved since the first quarter of 2022, Citi attributed much of that to over ordering and abnormal price increases during an unusual period.
The analysts recognized strong momentum in the company’s services segment and potential for digital services and Farm Tech, driven by improved milk-to-feed ratios. Still, they expressed skepticism about further acceleration beyond existing forecasts.