2024-01-21 07:58:20 ET
Summary
- Gentherm is the market leader in thermal management and pneumatic comfort technologies for the automotive industry.
- The company's historical financial performance has demonstrated strong recovery and growth post-COVID-19, with continued strong growth in 3Q23.
- THRM's addressable market is expected to keep growing until 2030, and the company is well positioned to capitalize on this growth due to its commanding market share.
- However, due to a lack of margin of safety in my target share price, I am recommending a hold rating.
Synopsis
Gentherm ( THRM ) is the market leader in terms of thermal management and pneumatic comfort technologies for the automotive industry. THRM’s historical financial performances have demonstrated strong recovery and growth post-COVID-19 impact, with 3Q23 results showing continued strong growth. Looking forward, THRM's market is expected to keep growing until 2030. As a market leader in nearly all the growth segments, THRM is well positioned to capitalize on this anticipated growth, boosting its growth outlook. Compared to competitors, THRM has outperformed in terms of forward growth outlook, while its profitability aligns with the industry. However, given the modest upside potential and lack of a significant margin of safety, I am recommending a hold rating for THRM stock.
Historical Financial Analysis
Over the last four years , THRM’s revenue has demonstrated strong recovery and growth. In 2021 and 2022, revenue increased by 14.57% and 15.15%, respectively, driven by favorable volumes in its automotive segment. However, in 2019 and 2020, the company experienced negative revenue growth, primarily due to unfavorable volumes in its automotive segment, a consequence of the COVID-19 pandemic.
Next, I will examine the company's profitability margins. Over the last four years, there has been a noticeable contraction in these margins. This contraction was most significant in 2022, with the gross profit margin decreasing to 22.72% from 29.02% in 2021. The decline in gross profit margin is primarily attributed to the increased volumes in its automotive segment, expenses from Alfmeier and Dacheng after the acquisition, inflation-related increases in wages, higher transportation and material costs, and impairment charges associated with the exit from its non-automotive electronics business.
Lastly, the company's debt-to-equity ratio [D/E] rose in 2022 to ~39% from ~10% in 2021. This increase is primarily attributable to the acquisitions of Alfmeier and Dacheng Medical in 2022.
Analysing 3Q23 Earnings Results
THRM reported strong earnings results for 3Q23 , with revenue growing 10% year-over-year to $366 million, up from $333 million in the previous period. The automotive segment also experienced strong revenue growth of 10% year-over-year, primarily driven by revenues from Alfmeier and record quarterly revenue from its climate control seats and steering wheel heaters. In the medical segment, revenue increased by 9.7% year-over-year, mainly due to robust sales of Dacheng air-warming blankets.
Regarding profitability margins, the gross profit margin slightly decreased to 23.5% in 3Q23, compared to 24.1% in 3Q22. This contraction was mainly attributable to the acquisition of Alfmeier, which has a lower gross margin compared to THRM's organic business. Additionally, management also cited inflation as one of the drivers of cost increases. However, compared to 2022's 22.72%, this represents an improvement.
The company reported an adjusted EBITDA of $47.7 million in 3Q23, up from $41.6 million in 3Q22, resulting in an improved adjusted EBITDA margin from 12.5% in 3Q22 to 13% in 3Q23.
Lastly, net income increased to $15.8 million in 3Q23 from $9.8 million in 3Q22. The net income margin improved from 3% in 3Q22 to 4.3% in 3Q23. Consequently, diluted EPS improved from $0.29 to $0.48.
Strong Market Growth for Gentherm’s Products
Based on the chart provided, it is evident that THRM’s market still possesses the potential for growth through 2030. For 2023, the total market value is projected to be ~ $2.5 billion, but by 2030, it is expected to increase to $4.6 billion. This growth represents a CAGR of ~9% over the next seven years.
Strong growth is expected across all the products that THRM produces and sells, such as pneumatic lumbar/massage systems, steering wheel heaters, seat heaters, and climate control seats [CCS]. Therefore, this expected strong growth will bolster THRM’s long-term growth outlook.
Global Market Share Leader
According to the chart provided, it is evident that THRM holds a leading position in global market share across nearly all of the growing product categories. In the areas of CCS and heated steering wheels, THRM commands an impressive 60% market share. While its market share in heated-only seats and pneumatic lumbar and massage systems is lower compared to CCS and heated steering wheels, THRM still maintains a significant portion of the total market share. Specifically, THRM owns 40% of the market for heated-only seats and 30% for pneumatic lumbar and massage systems.
With the strong anticipated growth discussed above, combined with its dominant market share, THRM is well positioned to capitalize on the anticipated industry growth, thereby bolstering its future growth outlook.
Highly Diversified Revenue
In addition to its strong market share and the anticipated growth in the market THRM operates in, its revenue is also very well diversified. According to the following chart, THRM's revenue can be categorized into three distinct regions: North America, Europe, and Asia. North America accounts for ~40% of total revenue, while Asia and Europe each contribute ~30%. This distribution demonstrates that no single market overwhelmingly dominates THRM’s revenue, contributing to the robustness of its business.
In each of the regions, THRM's revenue is made up of multiple popular brands which we are familiar with. This ensures that its business is further diversified, making it extremely robust. Even if one region reports weaker car sales or a particular brand experiences a downturn, the impact on THRM is mitigated due to its highly diversified global customer base.
Comparable Valuation Model
In terms of market size, THRM is significantly smaller than its competitors, with a market capitalization of $1.5 billion compared to the competitors’ median of $3.3 billion. This means that THRM is only 0.47x the median market capitalization.
Despite being less than half the size of its competitors’ median, THRM has outperformed them in terms of forward revenue growth rate. THRM's forward revenue growth rate is 14.6%, almost double the competitors' median of 7.56%.
When it comes to profitability, I do note that THRM trails behind its competitor’s median, but by a slight amount. THRM’s net income margin TTM is 1.25% vs. the median of 1.33%, which represents only 6% lower than the median.
Currently, THRM’s forward EV/Sales trades at 1.13x, while its competitors’ median trades at 0.48x. Given THRM’s significant out performance in its forward revenue growth outlook and inline net income margin, it is fair and justifiable for THRM to be trading at a higher multiple. In addition, THRM’s current forward EV/Sales is trading below its 5-year average forward EV/Sales of 1.76x.
The market revenue estimate for THRM is expected to reach $1.46 billion in 2023 and $1.57 billion in 2024. I believe these estimates to be reliable, as they are in line with management’s guidance. For FY2023, management guided revenue to be in the range of $1.45 to $1.47 billion. On top of that, my discussion on its financial strengths and growth catalysts above also supports this outlook. By applying its current forward EV/Sales to its 2024 revenue estimates, my 2024 price target is $51.83, and this represents a modest upside potential of 8%.
Risk
One upside risk to my hold rating concerns inflation. If inflation were to decrease more than expected, it could potentially improve THRM’s margins. Given its superior forward revenue growth compared to competitors, if THRM also outperforms in terms of net income, the market might adjust its multiples upward. This adjustment could lead to a greater appreciation in the share price.
Conclusion
THRM's past revenue has demonstrated strong recovery and growth from 2021 onward. The main driver of this was favorable volumes in its automotive segment. However, margins have been contracting annually due to inflation and the acquisition of Alfmeier. Management stated that Alfmeier has a lower gross margin compared to THRM's organic business. Analyzing its 3Q23 results, revenue continued to show strong growth in both its automotive and medical segments.
Looking ahead, THRM’s market is expected to continue growing until 2030 at a CAGR of ~9%. As a global market share leader in almost all of these growing segments, THRM is well-positioned to capture this strong growth. Therefore, I anticipate that the combination of strong growth and dominating market share will bolster its growth outlook.
When compared to its competitors, THRM, despite being smaller in size, has outperformed in terms of its forward growth outlook. Profitability-wise, they are neck and neck. However, my target share price indicates a modest upside potential of only 8%, which lacks a sufficient margin of safety. Therefore, I recommend a hold rating for THRM.
For further details see:
Gentherm: Strong Growth Outlook But Lacks Margin Of Safety