J.P. Morgan: Gates reaches North American growth turning point in third quarter as power transmission margins offset hydraulics investment

Why were third-quarter earnings better than JPMorgan expected?

In the third quarter of 2026, Gates reported revenue of 904 million dollars, broadly in line with JPMorgan’s forecast of 903 million dollars; adjusted earnings per share were 0.47 dollars, above the bank’s forecast of 0.45 dollars. The company’s overall adjusted EBITDA margin was 23.8%, up approximately 96 basis points year over year.
The main support came from the power transmission business: revenue was 560 million dollars, core revenue grew 5.2% year over year, and the adjusted EBITDA margin rose to 24.5%, up approximately 160 basis points year over year, reflecting operating leverage from revenue growth.
The hydraulics business posted revenue growth and a slight margin decline: core revenue grew 6.1% year over year, but investment in data centers and other growth initiatives partly offset the benefits of higher volumes. Its adjusted EBITDA margin fell approximately 10 basis points year over year to 22.8%.

A recovery in North American industrial demand drove 5.2% year-over-year core revenue growth in the Americas, with growth in North America offsetting a decline in South America. North American industrial original equipment manufacturer sales rose more than 20%, while the industrial aftermarket business grew by a high-single-digit percentage.
Management said North American automotive original equipment business declined by a low-single-digit percentage, weighing on overall growth; however, industrial end markets reached a turning point, and revenue growth accelerated progressively during the quarter.

Data center revenue reached approximately 2.5 times its level in the third quarter of 2025. Management expects related revenue to grow substantially further as liquid cooling adoption accelerates and the product range and customer base expand; customers include major cloud service providers and infrastructure builders.
Company-wide personal mobility sales grew approximately 35% year over year. Management maintained its target of 20%–30% growth over the next two to three years, while noting that growth cannot reach 40% every quarter; the relevant capacity is in place, and additional fluid conveyance and pump capacity is also being brought online in multiple regions.

The acquisition of Timken’s belt business closed at the beginning of the fourth quarter of 2026 and contributed nothing in the third quarter. Because Timken and its customers stocked up in advance to secure supply, management expects a very small contribution in the fourth quarter, with more meaningful revenue starting in 2027, equivalent to approximately 1% of company revenue. The acquired business’s initial margins will dilute the overall margin, with a target of reaching the company average within 12 months.
Management expects higher-cost inventory entering sales to slightly weigh on gross margin in the fourth quarter; normal seasonality and approximately 100 basis points of pressure from variable compensation will also apply.
JPMorgan maintained its overweight rating and 34-dollar price target for the end of December 2027, based on an enterprise value-to-EBITDA multiple of 11 times expected 2027 EBITDA, a 25% premium to Gates’ own three-year historical average. The bank believes margin resilience, free cash flow and an improving balance sheet support the valuation.