Gentex Corporation Stuck In The Rearview Mirror

May.15.13 | About: Gentex Corporation (GNTX)

Gentex Corporation (NASDAQ:GNTX) designs, develops and manufactures products for the automotive and aircraft industries. Its three primary products are vehicular automatic-dimming mirrors, commercial fire protection products, and aircraft dimmable windows.

Gentex asserts to be the first to have introduced "every mirror-borne electronic feature" to the automotive industry. Thus, Gentex has limited competition in the global marketplace for automatic-dimming mirrors claiming 88% of the market. Yet, automatic-dimming mirrors are included on less than 50% of the light vehicles produced annually. According to the International Organization of Motor Vehicle Manufacturers (OICA), over 63 million vehicles (excluding commercial vehicles) were produced in 2012. Based on Gentex's first quarter reporting, the revenue for mirrors was $263 million on 6.3 million units averaging $41 per unit.

With a penetration rate of 50% of 84 million vehicles, the market potential is $1.29 billion. If Gentex maintains 88%, its annual revenue rate is $1.14 billion which is slightly more than a projection of four quarters at $263 million or $1.05 billion.

The KTSA (Cameron Gulbransen Kids Transportation Safety Act of 2007) was signed into law in early 2008. The law has been delayed four times in the Office of Budget and Management and Department of Transportation since passage. Currently the effective date for implementation is September 2014. A fifth delay has been requested - which would mean two additional years to reach compliance. My personal opinion is that this is despicable, shameful and nothing short of embarrassing. The problem? Some say the $58 to $203 cost to automakers may be too expensive. Tell that to the parents of the more than 1000 children who have died since the law's passage and absence of implementation. For example, the Alliance of Automobile Manufacturers is suggesting a combination of cameras and less expensive curved wide-angle exterior mirrors claiming a $2 billion annual expense to automakers. The average price of a new vehicle is about $25,000. Imagine the impact of adding another $58 to $203 to a $25,000 price tag. Yes, that was sarcasm.

Ignoring the shameful inefficiency of government, 44% of U.S. automakers have included cameras in new models as of 2012. Nine in ten models have a dashboard display expected to accommodate installation of cameras if rearview mirrors are not utilized. While this is progress relative to transportation safety, it is not necessarily the best news for Gentex.

In the time since the passage of the KTSA, competition has dramatically increased for Gentex regarding rear-view mirror cameras. The primary point of competition focuses on the best location to display the image. Per Gentex's 2012 annual report:

"Any color display in a vehicle is relatively costly, and when a color display is required for other features such as navigation, radio or other vehicle functions, then it may be less costly on a per-feature basis to display the output of the backup camera in that in-dash display, offering significant competition to the RCD Mirror."

Four of Gentex's previously committed customers have opted for a radio display in the center console. These cancellations will impact shipments in 2013 and 2014. Gentex estimates displays tied into navigation systems represent the top 20% of the market. Through first quarter reporting, Gentex was shipping rear-camera display mirrors to 10 automakers for 58 models. As an example of how quickly Gentex is losing ground, the investor presentation in November, 2012 reported 11 automakers for 68 models. By the time the annual report was prepared in February, 2013, the count was 10 automakers for 64 models. However, it is important to note that Gentex is shipping automatic-dimming mirrors both with and without rear-camera displays. Along the same line, Gentex also reported the average unit price as $60 to $65 in the November investor presentation compared to the average $41 in 2013 first quarter reporting.

In Gentex's favor, habit supports the rear-view mirror as the optimal location for rear-camera displays as it is the place drivers already look when backing up. Studies have also supported that drivers brake twice as fast in response to a rear-camera image in the rear-view mirror as compared to an in-dash display. Rear-camera displays, however, are not the only innovation Gentex has incorporated into mirrors. In 2005, Gentex introduced to its mirror a vehicular high-beam headlamp assist system patented as SmartBeam. SmartBeam automatically turns a vehicle's high-beams on and off. Interior mirrors are also being utilized to display warnings and alarms. They can house signaling systems from garage doors, keyless entry remotes, gates, and security systems. Gentex is even developing lane departure warnings, sign recognition, and collision warnings for interior mirrors.

Unfortunately for Gentex, its revenue relies primarily on automotive mirrors. The aircraft dimmable windows and fire protection products represented only 2-1/2% of first quarter revenue. Even with the award of the Boeing 787 Dreamliner, Gentex expects less than $50 million over five years in aircraft window revenue.

Gentex boasts that it spends 95% of its time "thinking about auto-dimming mirrors." Incorporating safety and security features, driver-assist features and convenience features into the mirrors should serve Gentex in both maintaining and gaining market share. Yet, year-over-year revenue in the first quarter of 2013 was less than 2012 as was earnings per share. Considering an industry P/E average of 15 on a 2013 estimate of $1.26, Gentex's recent 52-week high of $24.76 on May 10th is tracking ahead of fair value at $18.90. Using a long-term EPS growth estimate of 13.3% and a 2014 estimate of $1.36, the YPEG result is similar at $18.09. It also does not bode well that 2013 and 2014 EPS estimates both represent less than 10% growth.

Investors, too, habitually review certain statistics and data. Looking in a rearview mirror, Gentex had impressive potential. However, warnings and signals are lighting up on the road ahead for Gentex.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I belong to a stock club that voted to sell its shares of GNTX on May 13th.