Should Investors Buy In On Gentex's New Lows?

| About: Gentex Corporation (GNTX)

On Tuesday, shares of Gentex (GNTX) got hit hard by a weak earnings report, news of potential lawsuits, and weak guidance. Shares were down 29% during Tuesday's trading session and closed at $15.01. Over 22 million shares traded hands, which marked a huge increase on the 1.3 million average volume over the last three months. Shares hit a new low of $15.01 on Tuesday and continue to trade lower during today's trading session. Gentex shares are now down 50% on the calendar year.

I first talked about the possibility of a lawsuit in a recent article. In fact, I called the article "Gentex Could Test New Lows With New Lawsuits." It's hard to speculate which of the negative factors from the earnings call weighed on the stock's decline the most, but I'm willing to bet that the company finally publicly announcing they were exploring a possible lawsuit. In that article I said:

"Despite recommending shares of Gentex several times over the last two years, I have to now recommend selling shares of Gentex. The company faces three big negatives this year now with potential lawsuits, weak European car sales, and the lack of rear view camera legislation."

In the conference call, Gentex touched briefly on the pending litigation. Gentex has not yet been served with complaint but are evaluating infringement on patents. Gentex did not come out and publicly deny any wrongdoing, which spooked investors away.

For the second quarter, Gentex saw net sales of $280.3 million. This marked a 15% increase from last year's $243 million reported in the second quarter of 2011. Net income for the quarter increased 6% to $40.8 million. Earnings per share increased to $0.28, versus last year's $0.27. Analysts had been calling for earnings per share of $0.29 on net sales of $280.6 million.

Automotive net sales were up 15% to $274.8 million in the quarter. Auto dimming mirror units were up 19% (up 33% in North America). Net sales in the other segment grew 13% to $5.4 million, from strength in dimmable aircraft windows. The aerospace market continues to see growth for Gentex. Gentex supplies the new Boeing (BA) 787 with 100 dimmable windows. Gentex also has 15 windows in each Beechcraft King Air 350i planes.

Here are some highlights from a July investor presentation:

  1. Gentex has a 87.9% global market share on auto dimming mirrors (number two Magna Mirrors has 10.6% share)
  2. Potential $3 billion market potential for auto dimming mirrors. This was based on 76.5 million light vehicles produced annually and auto dimming mirrors penetrating 45% of the market over 10-12 years. In 2011, 23% of light vehicles had an auto dimming mirror, while 6% had exterior auto dimming mirrors
  3. Adding new features to rearview mirrors including: tire pressure, rain/fog sensing, garage door openers, traffic sign recognition, and collision warning
  4. Shipped 1 million Smart Beam units in 2011 and expect that number to increase 40-45% in 2011.
  5. Gentex rear camera displays are present in 61 models across 10 automakers
  6. Shipped 1.7 million rear camera display units in 2011
  7. Expect a final ruling on the Kids Transportation Safety Act on December 31st, 2012

Analysts on Yahoo Finance are calling for full year earnings of $1.23 in 2012. The following year, analysts see Gentex earning $1.40 the following year. Gentex issued guidance for the third quarter with net sales growth of 0-5%. In the third quarter of 2011, Gentex reported net sales of $269.47 million. Gentex guidance puts third quarter net sales at $283 million on the high end. Investors had been predicting $283 million in net sales as well. With an earnings miss of $0.01 and guidance that falls close to estimates, why the big fall? It's possible that the pending lawsuit caused investors to flee as Gentex already faces a tough automobile market with European weakness.

The biggest reasons to buy Gentex now:

  1. Shares at three year low
  2. Clear market leader
  3. Dividend yield of 2.4%
  4. Potential December ruling on Kids Transportation Safety Act

With shares trading under $15 for the first time since October 2009, I have to recommend buying at these levels. As you can see above, I predicted the fall of Gentex shares and hit all three reasons on the money. I now have to turn bullish once again on shares as a swing play and a long term buy. My price target remains at $25 long term.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GNTX over the next 72 hours.