Gentex Stock: Opportunity to Own a Quality Asset at a Discount (NASDAQ: GNTX)

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Gentex Corporation (GNTX) generates 98% of its revenue by selling products to automotive OEMs, primarily its auto-dimming mirrors in which it has a 94% market share. The company is trying to diversify by entering different verticals such as aviation and healthcare. GNTX’s strong balance sheet, moated products, and heavy investment in R&D will likely ensure its success for the foreseeable future. The shares are worth between $34 and $43 depending on how successful GNTX is in new verticals. But even in the conservative scenario, you would own a large company that offers 8% capital appreciation and a 1.5% return on capital.

Bears says demand for the product will decline with self-driving, however, there are three reasons that don’t support that. First, mirrors are a relatively inexpensive way to have redundant security measures in the vehicle. Second, GNTX is also in the camera business, so even if mirrors play a lesser role in self-driving cars, GNTX will offset the decline in mirrors with camera sales, and keep in mind that cameras cost more. Third, cars are under-penetrated, only a third of cars have auto-dimming interior mirrors and only a fifth have auto-dimming exterior mirrors. Since these mirrors are safer than regular mirrors, I see OEMs increasing the penetration of auto-dimming mirrors in their products.

4Q21 benefits

Even though light vehicle production decreased by 3% in 2021, GNTX was able to increase revenue by 3% to $1.73 billion. Demand for Full Display Mirror units was high during the year, in fact, shipment of these units increased by 7% during the year. However, 4Q21 results were impacted by the chip shortage. Revenues fell 20.8% to $419.8m, due to a 20% decline in light vehicle production. On smaller segments, GNTX showed interesting results. For example, aircraft windows and fire protection products increased by 23% and 32% respectively.

Gross margin decreased 100 basis points to 34.3% from 3Q21 due to product mix, labor and chip shortages, raw material inflation, related costs freight and labor inefficiencies due to last minute changes in customer demand. On the earnings call, management said these issues should be resolved by the second half of 2022.

Additionally, thanks to its strong balance sheet with substantial cash and no debt, GNTX returned $439.9 million to shareholders by maintaining the dividend and repurchasing 9.6 million shares at an average price of $33.83. per share.

Paid R&D

Most of GNTX’s revenue is generated by the automotive sector, accounting for approximately 98% of revenue. However, they are branching out into other verticals. GNTX sells auto-dimming windows to Boeing and Airbus, develops health products by partnering with the Mayo Clinic, develops glasses for the visually impaired, to name a few of the R&D initiatives. The company’s heavy investment in R&D, 6.5% of revenue, will ensure the company remains relevant in this rapidly changing market.

Dividend

Since 2003, GNTX has increased the dividend every year except 2010 and 2021. But even during the pandemic, GNTX has kept its dividend at $0.12 per quarter. GNTX has $267.7 million in cash and no debt, so I think the dividend is very safe and in fact management can accelerate the share buyback plan to take advantage of the current share price.

Gentex historical dividend

Looking for Alpha

Orientation 2022

Since GNTX is heavily dependent on light vehicle production, the forecast is based on an assumption of light vehicle production. They depend on IHS Markit forecasts which assumed an 8% growth in production in 2022 to reach 69.4 million vehicles. By 2023, they expect production to increase by 10% to 76.6 million vehicles produced.

For 2022, management expects revenue to grow 8% to 17%. This implies that GNTX will outpace the growth of light vehicles by increasing its penetration with OEMs and its growth in new segments such as the aircraft window business. The same is true for 2023, management expects revenues to increase by 15% to 20% while vehicle production will increase “only” by 10%.

Regarding gross margin, they expect margins to hold or deteriorate slightly from the current margin of 35.8% to 35% to 36%. This is understandable as they expect the headwinds mentioned above to be resolved only in the second half of the year.

Investment forecasts have more than doubled to a range of $150m to $175m. The reason for this significant increase is threefold. First, there is a capacity problem to meet the expected growth in 2022 and 2023. Second, all the new products they launch our new product lines and that requires additional investment. Finally, 25M USD of these capex are actually planned capex for 2021 but have been postponed due to shortages.

Evaluation

I used a WACC of 8.8% based on an unleveraged beta of 1.21 for the auto parts sector and a leverage ratio of zero. The value per share is $34 based on the following assumptions.

Gentex assumptions

Author’s estimates

I assumed revenue growth in line with management’s forecast for 2022 and 2023, then declining to 2%. This is a very conservative assumption, since since its inception, GNTX has increased its revenue by an annual average of 19.6% and 5.6% over the past 10 years. The heavy investment in R&D will ensure the relevance of GNTX in the market in the future. If I assume low double digit growth through 2027, the per share value easily increases to $43 per share.

Gentex historic revenue growth

Y-Charts

Conclusion

GNTX is a company I would buy and accumulate forever. It has a great product, is constantly innovating, hoards cash, has no debt, pays a predictable dividend that has increased in 16 of its 18 year history, and buys back stock opportunistically. In the conservative scenario, the stock offers an 8% upside and in the best-case scenario, it offers a 36% upside.

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