GNTX - Gentex: Do Not Look At The Rearview Mirror

2023-09-12 04:53:09 ET

Summary

• Gentex is a consistent outperformer in the automotive supplier industry.
• The company combines functionality and technology in its rearview mirrors, gaining market share from peers.
• Gentex has seen strong growth in 2023 and expects further growth in 2024, making it an attractive investment.

While investing in the automotive supplier industry is a very tricky endeavor for investors, I have long regarded Gentex ( GNTX ) as somewhat of a consistent outperformer.

My last take on the business dates back to 2015 when I believed that the consistent and strong performance warranted a premium valuation. While the overall topline and margin performance has been a bit less impressive in recent years, Gentex has seen strong growth this year.

As it looks, the business has found some of its operating performance, as Gentex deserves a premium valuation, making me a buyer on dips here, with momentum set to last into 2024.

A Recap

Gentex is an automotive supplier of rearview mirrors and while this looks like a boring business, Gentex has been thriving on the back of combining functionality and technology at solid prices. The idea of Gentex is to combine the traditional mirror with technology in order to improve vision, safety and functionality. Moreover, the company has developed adjacent technologies, among others including adjusting the lighting for the mirror as well as rearview park assist technology.

These traits make that Gentex continues to gain market share from its peers. Consistent growth, high margins and a strong balance sheet created appeal with the business trading at a market-equivalent multiple, at least that was the case back in 2015.

At that time, the company was generating about $1.5 billion in sales, generated by over 30 million units being shipped. Making these products have yielded the business substantial earnings of close to $300 million, which came on top of a net cash position of around $400 million.

Trading at $18 per share in 2015, equity of the business was valued at $5.4 billion, with operating assets valued at $5.0 billion if we factor in net cash, as the company traded at 17 times earnings.

What Happened?

Trading at $18 in 2015, shares of Gentex have seen solid returns, having doubled to the $35 mark in 2021 and 2022. Shares fell back to the $25 mark in the fall of 2022, and trading in the mid-twenties early this summer, they have rallied to the $32 mark today.

Forwarding to 2022, Gentex has grown sales to $1.92 billion, with sales up 11% in 2022. It is quite clear that growth has slowed down, with revenues up just 30% since 2015, as the topline grew at a much slower pace than before. Despite the strong topline results, earnings took a beating with operating profits falling from $410 million to $370 million on the back of inflationary and efficiency issues.

Net earnings fell to $319 million, making that earnings fell from $1.50 per share to $1.36 per share, as the company maintained a net cash position around $400 million.

So while overall sales growth has been lackluster, with margins actually down, Gentex has been a serial and consistent buyer of its own shares, having reduced the float by nearly a quarter from 2015. These buybacks, modest sales growth, and some margin pressure were the drivers behind shares doubling since 2015. With earnings reported at $1.36 per share and net cash balances equal to around $2 per share, valuations had run quite a bit higher at 24 times earnings based on the 2022 performance.

2023 - Solid So Far

Gentex has been off to a strong 2023, with first quarter sales up 18% to $551 million. Operating profits rose by ten million to $113 million, as GAAP earnings improved by five cents to $0.42 per share.

Second quarter revenues rose by 26% to $583 million, on the back of a record 12.9 million unit shipment. Operating profits rose to $127 million, with earnings reported at $0.47 per share.

On the back of the strong quarter, the company hiked the full year sales guidance to a midpoint of $2.25 billion. Full year operating earnings are seen at a midpoint of $472 million, which reveals not only that earnings are set to recover meaningfully in 2023, they might even approach $1.80 per share. Furthermore, net cash balances have risen towards the half a billion mark.

Based on the $1.80 earnings per share number, the unleveraged assets trade at 18 times earnings, as 2023 has been very strong, perhaps unexpectedly strong in my view. Moreover, the company sees further growth. 2024 sales are expected to rise further to $2.5 billion, marking another year of double-digit growth next year, as operating momentum has returned.

And Now?

Working with a $2 earnings per share number going forward, for the second half of 2023, and 2024, multiples are compressing quite a bit. Trading at $32 here, and subtracting a net cash position of nearly $2 per share, the operating assets are valued around 15 times earnings.

This looks like quite an attractive multiple for a long term value creator; although, the operating performance ahead of this year was a bit on the softer site, raising some questions. With the 2023 performance looking very strong, and the read-out for 2024 looking promising as well, I have to give the company a bit more credibility.

Quite frankly, I like Gentex quite a bit. I'm looking to initiate a position around the $30 mark, with the intention to average down from there.

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