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Wide-moat GEA Group, is an expert in food processing. It manufactures equipment for separation, fluid handling, dairy processing, and dairy farming, and designs and constructs process lines or entire plants for customers.
Based in Germany, GEA Group is a global market leader, with number one or -two positions in its markets. Its separators are used in hundreds of different, tailored applications. Every fourth liter of milk, third instant coffee line, third chicken nugget, and second liter of beer globally is processed with GEA’s specialized equipment.
Similar to British American Tobacco, we are highlighting GEA because it trades at just over a 30% discount to analyst Denise Molina’s EUR 45 fair value Molina thinks there are near-term headwinds as the firm’s restructuring efforts take effect, but her medium-term revenue growth forecast at 4.4%, including acquisitions (around 40 basis points of growth), remains intact. Molina believes GEA’s business and market positions reflect a wide moat. New entrants face a high barrier to entry trying to establish themselves in an industry where established firms are trusted to ensure that branded products are differentiated and consistent, and that they do not carry the risk of causing foodborne illnesses.
Existing market shares are stable for a similar reason: Food processing companies have a significant risk aversion to changing trusted suppliers. The sources of GEA’s moat are its intangible assets and high switching costs. GEA’s intangible assets come from its leading patent-protected technologies and reliability as a partner. In dairy farming and processing, it has been supplying to the market for more than a century. Its high switching costs come from barriers to entry created by regulatory requirements and the sensitivity of its customers to safety concerns and food scandals.