Gentex (GNTX) is an automotive supplier of rearview mirrors. While this sounds like a boring business, Gentex has been very successful at combining functionality and new technology at great prices.
As a result of this strong market position, the company continues to gain market share while it reports fat margins. The company just released its first quarter results in which revenues were up by nearly 10%. This is a strong achievement given that the global automotive market is not showing any growth at all.
This consistent growth, high margins and strong balance sheet create real appeal given that the company only trades at market-equivalent valuation multiples. As a result of these favorable circumstances, I believe that shares continue to offer value for long-term investors.
The Products
Gentex is a producer of high-tech rearview mirrors. The company aims to combine the traditional mirror with technology to improve vision, safety and functionality. The company has used technology to automatically adjust the lighting for the mirror as well as developed rearview park assist technology.
With the acquisition of HomeLink, users can hit buttons on the mirror in order to open their garage doors, security gates or enable security systems. The combination of great design and high functionality creates huge demand for these mirrors, allowing Gentex to consistently gain market share.
Solid Start To The Year
Gentex reported first quarter revenues of $368.9 million, a 9.9% increase compared to the same period in the year before.
These revenues have been supported by an 11% increase in mirror shipments which rose to 7.93 million units. The company generates over 97% of its sales from these mirrors, with safety security products making up for the remainder of sales. The fact that average selling prices per mirror fell slightly to roughly $45 is not a real surprise. The company has large German customers as the dollar strength has hurt the translation of those sales.
Gentex reports that total worldwide light vehicle production was actually down by 2% in the first quarter. That growth decline applies to the primary markets in which Gentex is competing. This huge gap with reported revenue growth implies that the company continues to gain market share.
Gross margins fell by 30 basis points to 38.8% of sales following costs associated with new technology investments, price reductions and currency moves, among others. The great news is that operating expenses have again been very well contained. Operating costs fell by 60 basis points to 9.6% of sales as the company continues to demonstrate impressive cost control.
The modest overall margin gains and topline sales growth have been pushing earnings higher. This is despite the fact that "other" earnings fell from $4.5 million last year to just $0.7 million. The company has seen lower returns on its cash and equivalent balances as rates continue to be under pressure. This incremental headwind has been offset by a lower tax rate following a retro-active reinstatement of R&D tax credits. All in all, net earnings have been up by 12.6% to $77.2 million.
Sticking To The Guidance, Tight On Costs
Gentex is sticking to its full year guidance which calls for sales to come in at $1.47 to $1.54 billion. This calls for 7-12% sales growth as the first quarter has been perfectly in line with this trajectory. The fact that the company reiterates its sales outlook is comforting as the company sells roughly two-thirds of its mirrors abroad, creating real foreign exchange headwinds.
The company continues to believe that gross margins will come in at 38.5-39.5%. At the midpoint of the revenue and margin target, gross profits are seen at $587 million. The good news is that the guidance for operating costs is cut to $148 to $154 million. This implies a $2-$3 million cut versus the initial guidance.
After applying a 32% expected tax rate on these earnings, Gentex could post net earnings of $295 million. If achieved, net earnings would be up slightly from the $289 million reported in 2014.
Appealing Valuation, Strong Position
Gentex ended the first quarter with $550 million in cash and equivalents. The company holds another $115 million in long-term investments. Given that the debt load stands at just $256 million, Gentex operates with a net cash position of more than $400 million.
While the company has spent $25 million to buy back 1.4 million shares over the past three months, the shareholder base has been diluted to 298 million shares. These shares value the business at $5.4 billion with shares trading at around $18 per share. Excluding the net cash holdings, operating assets are valued at $5.0 billion.
Given the outlook which calls for sales of $1.5 billion, operating assets are valued at just around 3.3 times sales. The company now trades at 17 times earnings forecasted for this year.
Long-Term Growth At A Fair Price
Gentex is currently valued at a market-equivalent valuation multiple of 17 times earnings. This is despite the fact that the company has a great long-term track record in terms of profitable growth, while the business has a rock solid balance sheet.
Between 2005 and 2015 the company is on track to triple its sales from roughly $500 million to $1.5 billion. This translates into average growth of 11-12% per year. Despite the rapid growth, Gentex managed to actually slightly reduce its share count over this time period. On top of the superior topline achievements, margins have been both stable as well as very high.
This strong performance of Gentex is really the result of focus on innovation and technological products. The strong revenue growth exceeds the growth reported by other much larger automotive suppliers. BorgWarner (BWA) has nearly doubled its sales over the past decade and now trades at 21 times earnings.
Johnson Controls (JCI) which actually sold the HomeLink business to Gentex a few years ago is now trading at a steep 22 times adjusted earnings multiple. This seems like a very premium valuation given that the company holds over $7 billion in debt while cumulative revenue growth over the past year has been stuck at 50%.
The premium valuations for these two competitors are surprising. Gentex has both superior growth, margins and balance sheet strength versus these competitors. While Gentex reports nearly 10% growth on an annual basis, Johnson Controls managed to grow sales by just 1% in its most recent. Growth at BorgWarner has been better at little over 5%, although that is just half the rate at which Gentex is growing.
This current discount appears to be the result of long-term underperformance of the shares of Gentex. While sales have tripled over the past decade, shares have "only" doubled. This marks a long-term underperformance versus its peers as well, as Gentex is very well positioned to deliver on a future outperformance.
Final Thoughts
Long-term investors can still add and maintain their investment in Gentex in my opinion. The consistent market share gains and focus on technology make it likely that the company actually plays a leading role in the digitalization of cars.
This adoption of technology reduces the concerns about becoming redundant in the long term if we will see driverless cars. Gentex is already very pro-active, driven by the excellent purchase of HomeLink of course. These kind of solutions will continue to be in demand, even in driverless cars. The cash-rich balance sheet, appealing valuation and this underlying strength make me believe that shares might see further upside going forwards.
Following the consistent growth and margins, I believe that shares warrant a premium versus the rest of the market and its peers. At the current moment, shares only trade at market-equivalent multiples while Gentex trades at a discount versus its competitors.
