Gentex: A Strong Company In A Weak Sector

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About: Gentex Corporation (GNTX)
by: Hidden Opportunities
Summary

Declining global auto sales in 2019 have impacted many auto parts manufacturers. Gentex Corporation continues to outperform compared to its peers in the space.

The company has a healthy balance sheet and has demonstrated a strong growth in FCF.

Gentex Corp. is a value opportunity in the emerging connected vehicle/autonomous vehicle space.

Gentex Corporation (GNTX) is a mid-cap company that designs, develops, manufactures, and markets digital vision, connected car, dimmable glass, and fire protection products. In the current market situation of reduced automotive sales, Gentex represents a fundamentally strong company that is outperforming its peers in the auto industry. Gentex Corporation presents a good opportunity in the emerging connected vehicle / autonomous vehicle space.

Investment Thesis

Gentex Corp. falls under the category of companies that manufacture automotive components for sale to automakers.

Sales Growth

Gentex has been demonstrating increasing top-line and growing net margin since 2014.

Data Source: WSJ

Strong Free Cash Flow Growth

Data Source: WSJ

Based on the free cash flow growth, a discounted cash flow model reveals the intrinsic value to be $47.25. This indicates a 73% upside.

Share Buyback and Dividends

During the six months of FY2019, Gentex repurchased 7.8 million shares. They issued 3.3 million shares as part of the company’s share based compensation plan. Overall, this led to a reduction of 4.5 million shares.

The company already has a repurchase program to purchase of an additional 25 million shares of its common stock.

In March 2019, Gentex's Board of Directors authorized an increase of 5% to the quarterly cash dividend to $0.115 (11.5 cents) per share.

It is a positive sign for long term investors to see management effectively use the company’s cash flow in share repurchases and dividends.

Healthy Balance Sheet

As of June 30, 2019, Gentex Corporation has no long term debt. The short term debt on the balance sheet amounts to $1 million.

Growth

Automotive manufacturers are increasingly competing to provide the latest technology to their customers in subsequent releases of their vehicle models. Reports show that consumers now warming up to the idea of veto reliance on car technology. U.S. millennials, in particular, are already willing to spend $1,206 more on car technology over other generations.

Source: Gentex Corporation Website

Gentex products are not restricted to gas powered vehicles. The company is well positioned to cater to the emerging autonomous vehicle and connected vehicle space.

Some of the challenges around Gentex

Tariffs on US Imports from China

In May 2019, the Trump administration imposed additional tariffs on goods imported from China. Auto Parts are included in the list of goods affected by this tariff. The additional 15% tariff on Gentex Imports from China is likely to impact the company’s gross margin.

In order to reduce the tariff impact, Gentex Corp announced along with their Q2 results that they are looking at their existing supply base and checking if they had manufacturing capabilities outside of China. The team is also working on identifying new suppliers outside of China.

These steps are likely to help the company diversify its supply base and reduce the impact of tariffs. However, it is not a quick fix and is likely to take a few quarters to achieve.

Auto Sales Decline

Global auto sales decline has been impacting auto manufacturers, parts suppliers and several other players in the auto industry.

Gentex has been outperforming its peers in 2019. With a 3% increase in Q2 YoY revenue and ~2% YoY increase in the 6 month revenue compared to 2018, Gentex has been performing well despite the global auto sales decline.

Source: WSJ

Just for the purposes of comparison with other players in the auto parts industry, I went on to look at the YTD performance of Magna International (MGA), Delphi Technologies (DLPH) and Aptiv (APTV). While this is not a comprehensive list of next generation auto technologies companies, I would like to highlight a YoY decline in sales among peers.

Source: Magna International Q2 report - Sales in Million USD

Source: Delphi Technologies Q2 Report

Source: Aptiv Q2 Report

With the Federal Government exploring the possibility to reduce interest rates in the coming weeks, new vehicle sales are likely to show improvement during the remainder of 2019.

Product Mix

Currently, 98% of Gentex Corporation’s net sales comes from the automotive industry. However, other than driver safety and driver assist products, the company also caters to the aviation industry with its dimmable aircraft windows.

In January 2019, the Company announced that it would be offering, as optional content, its latest generation of variable dimmable windows on the Boeing 777X aircraft. While it seems early in the game, Gentex appears well-positioned to acquire a decent market share in the estimated $10 Billion smart glass industry.

Source: Gentex Website

Gentex Corporation also manufactures photoelectric smoke detectors and alarms, visual signaling alarms, photoelectric smoke detectors and electrochemical carbon monoxide alarms, electrochemical carbon monoxide detectors and alarms, audible and visual signaling alarms, and bells and speakers for use in fire detection systems in office buildings, hotels, and other commercial and residential establishments.

Conclusion

Gentex Corporation has a line of technology products that cater to the growing connected vehicle/autonomous vehicle industry. The company has a strong balance sheet and is demonstrating sales growth despite global decline in new vehicle sales. To escape the heat from the newly imposed tariffs, the company is exploring its options on diversifying its sourcing away from China. With the US and Chinese government officials at the negotiation table, there is a possibility of a mutually acceptable trade deal that could lower the 25% tariffs on auto parts imports from China. In the long term view, I believe Gentex Corporation is a strong buy and hold opportunity.

Disclosure: I/we 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.