Summary
- Gentex Corporation continues to post consistent revenue growth, but profits and cash flows have been less than ideal.
- This may be a turnoff to investors, but shares still look attractively priced, especially after falling like they have in recent months.
- Though not a strong prospect, the company should still fare well in the long run.
Given the state of the economy, particularly when it comes to supply chain issues, inflation, and rising interest rates, investing in a company dedicated to the automotive market may not seem like the best idea. Having said that, one firm that definitely should catch the attention of investors is Gentex Corporation ( GNTX ). As a manufacturer of digital vision, connected car, and dimmable glass products, the automotive supplier is a truly niche player. It also sells fire protection products too. Recent financial performance achieved by the company has been rather mixed, with revenue continuing to rise but profits and cash flows worsening. But even with that factored in, shares look attractively priced on an absolute basis and no worse than fairly valued compared to similar players. While I fully expect volatility for the company to continue, I do think that the long-term outlook for the firm is positive. So, for those who don't mind being patient, I would consider this a ‘buy’ candidate at this time.
Mixed results have worked against the business
Back in April of this year, I wrote an earnings preview covering the first quarter of the 2022 fiscal year for Gentex. In that article , I admitted that the company had been going through some tough spots over the prior few months, with weakness on both the top and bottom lines of the firm working against it. Having said that, management still remained optimistic about the 2022 fiscal year and its entirety, even as analysts had a more unfavorable view of the company. I ultimately concluded that shares were becoming more attractively priced, but I also acknowledged that the picture could change rather quickly. This didn't stop me, however, from rating the company a ‘buy’, reflecting my view at that time that its shares should outperform the broader market moving forward. Since then, the company has generated a loss for investors of 13.1%. Although painful, this is measurably better than the 18.4% decline seen by the S&P 500. In that context, my call has proven to be pretty accurate.
This slight overperformance came in large part because of increased sales achieved by the company. Over the first two quarters of its 2022 fiscal year, revenue came in at $931.7 million. That's 2.2% higher than the $911.7 million generated the same two quarters one year earlier. Although the company saw the number of shipments of North American interior mirrors grow by 9%, these were somewhat offset by weakness elsewhere. North American exterior mirror shipments were down by 2%. International mirror units were down by 5%. And on the whole, total auto-dimming mirror units were down by 2%. It's worth noting that sales growth was particularly strong in the second quarter of the year, with revenue of $463.4 million coming in 8.3% above the $428 million reported the same time one year earlier. This was driven by a 1% increase in total international mirror units and a 14% surge in North American interior mirrors.
Although it's nice to see revenue increase, profitability for the company has been somewhat problematic. In the first half of the year, net income came in at $159.9 million. That's down from the $200 million reported the same time one year earlier. This change, management said, was largely as a result of the company's cost of goods sold rising from 63.3% of sales to 66.9%. The overall margin contraction the company experience was largely due to higher raw material costs, higher labor costs, and yearly customer price reductions. Other profitability metrics followed suit. Operating cash flow went from $252.2 million down to $189.3 million. Even if we adjust for changes in working capital, it would have fallen from $259.9 million to $231 million. Meanwhile, EBITDA for the company also fell, dropping from $285.1 million to $239.1 million. This same weakness existed in the second quarter alone. Net income of $72.4 million was lower than the $86.5 million reported one year ago. Operating cash flow surprisingly increased, rising from $61.4 million to $73.3 million. But if we adjust for changes in working capital, it would have inched down from $116.8 million to $111.7 million. Meanwhile, EBITDA for the firm declined from $125.8 million to $111.1 million.
One good thing for investors is that management has been fairly detailed when it comes to guidance. At present, management is forecasting revenue of between $1.87 billion and $1.97 billion. This is, admittedly, a drop from the prior expected range of between $1.87 billion and $2.02 billion. But even so, it would mark an improvement over the $1.73 billion generated in 2021. Management is also forecasting net income of $344.9 million. This would represent a slight decline compared to the $360.8 million reported for the 2021 fiscal year. But given how results have been so far, that shouldn't be surprising. If we assume that other profitability metrics will change at the same rate that net income should, then we should anticipate adjusted operating cash flow of $424.7 million and EBITDA of $486.5 million.
Given these figures, we can calculate that the company is trading at a forward price-to-earnings multiple of 6.4. The forward price to adjusted operating cash flow multiple is 13.4, while the EV to EBITDA multiple should be 11.1. As you can see in the chart above, these multiples, using data from the 2021 fiscal year instead, would be slightly lower at 15.7, 12.8, and 10.6, respectively. Part of my analysis also included comparing the company to five similar businesses. On a price-to-earnings basis, these companies ranged from a low of 8.6 to a high of 44. Two of the five companies were cheaper than Gentex. Using the price to operating cash flow approach, the range was between 12 and 110.4, with one of the five firms being cheaper than our prospect. And finally, using the EV to EBITDA approach, the range was between 6.3 and 30.5, with four of the five being cheaper than our prospect.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Gentex | 16.4 | 13.4 | 11.1 |
Autoliv ( ALV ) | 20.8 | 12.0 | 9.5 |
Lear ( LEA ) | 29.7 | 16.5 | 9.9 |
Fox Factory Holding Corp. ( FOXF ) | 44.0 | 110.4 | 30.5 |
Standard Motor Products ( SMP ) | 13.0 | 13.8 | 8.0 |
Modine Manufacturing Co. ( MOD ) | 8.6 | 49.3 | 6.3 |
Takeaway
What data we have today suggests to me that Gentex continues to climb from a revenue perspective nicely. But profits and cash flows are worsening and while shares of the company are cheap, they definitely aren't in what I would refer to as deep value territory. With that being said though, I do still believe that the company is trading cheap enough to warrant a soft ‘buy’ rating at this time.
For further details see:
Gentex Corporation: Attractive Even With Margin Deterioration