Gentex Corporation (GNTX), the producer of automatic dimming review mirrors and camera-based lighting and other driver assisting tools announced the acquisition of Johnson Controls' HomeLink business.
The acquisition is executed at fair levels and makes strategic sense, making a long-term investment in Gentex worthwhile.
HomeLink is a vehicle-based control system allowing drivers to remotely activate garage doors, home lights and security systems, among others. Some of its services have already been integrated with Gentex's automatic-dimming rearview mirrors. HomeLink´s solutions are sold across most parts of the globe.
CEO and Chairman Fred Bauer commented on the rationale behind the deal:
"HomeLink is a strategic and welcome addition to our portfolio of automotive products. Our two businesses share similar cultures and traits, both being people-oriented, innovative, leading and technologically-driven."
Gentex expects that HomeLink´s operations will increase its annual revenues by approximately $125 to $150 million. The deal will boost company wide gross margins between 1 and 1.5%. As such, the deal will be accretive to earnings per share going forward.
The deal is subject to normal closing conditions, including regulatory approval. If all goes to plan, Gentex anticipates to close the deal around the 30th of September.
Gentex ended its first quarter of 2013 with $518.5 million in cash and equivalents. The company operates without any debt, for a comfortable net cash position.
First quarter revenues for the year came in at $269.5 million, down 7% on the year before. Net earnings fell by merely 2% to $45.4 million.
Full year revenues for 2012 came in at $1.10 billion, and most likely Gentex will report slightly lower revenues for 2013 after years of steady growth. Net income for 2012 came in at $168.6 million and could come in around the same level for this year, excluding the impact of HomeLink.
Trading around $23-$24 per share, the market values Gentex at $3.4 billion. Factoring in the solid net cash position, operating assets are valued at merely $2.9 billion. This values the firm at 2.6 times annual revenues and 17-18 times annual earnings.
Gentex pays a quarterly dividend of $0.14 per share, for an annual dividend yield of 2.4%.
Some Historical Perspective
Over the past decade, shareholders in Gentex have seen their ups and downs. Shares traded around $20 back in 2004, but fell to lows of $8 in 2009.
Shares have seen spectacular returns ever since, rising towards $30 in 2011. Following the disappointing developments in recent times, shares fell back again towards their mid-teens in 2012. Shares have steadily risen again from last year's lows, currently exchanging hands between $23-$24 per share.
Between 2009 and 2012, Gentex has doubled its annual revenues towards $1.1 billion. Net earnings rose even sharper, coming in at $168.6 million over the past year.
The purchase is quite a sizable deal for Gentex, with the purchase price making up roughly a fifth of its current market capitalization.
The deal values HomeLink at roughly 5.0 times annual revenues, a sizable premium compared to Gentex' current valuation. Yet the profit contribution should make up for this. HomeLink could boost total gross margins of Gentex by 1 to 1.5% from 2012's gross margins, which came in at 33.9%. Consequently, gross profits could increase by roughly 16% towards $435 million, while net profits could increase towards $180-$200 million.
Following closure of the deal, Gentex will operate with a very modest net debt position of around $200 million. As such, the market values Gentex at around $3.4 billion, as the combination is on track to generate annual revenues of almost $1.25 billion. The company could earn between $180 and $200 million on a pro-forma basis.
The valuation for the pro-forma assets will come down to 2.7 times annual revenues and around 17-18 times annual earnings. All in all, the deal is fair for Gentex, resulting in modest earnings per share accretion as it further diversifies its business.
The modest net debt position incurred following the deal might slow down the pace of share repurchases, as Gentex is typically financed in a conservative way. Under its current plan, Gentex has a 4 million shares currently being authorized to be repurchased, sufficient to retire almost 3% of its current share base.
The current valuation seems fair around 17-18 times earnings. The company's 88% market share in the market for automatic-dimming mirrors is impressive. The company has created a nice little profitable niche for itself.
Shares are trading around fair levels at these levels, and the addition of HomeLink makes sense as well, as it is accretive to earnings and makes perfect strategic sense. Long-term holders could hold on to their holdings at these levels.