Sergey Basalyga
0
All posts from Sergey Basalyga
Sergey Basalyga in TX Group,

Gentex: An Undistorted Mirror

Introduction

Gentex Corporation, incorporated on January 11, 1974, designs and manufactures automatic-dimming rearview mirrors and electronics for the automotive industry, dimmable aircraft windows for the aviation industry, and commercial smoke alarms and signaling devices for the fire protection industry. The Company’s business involves designing, developing, manufacturing and marketing interior and exterior auto-dimming automotive rearview mirrors that utilize electrochromic technology to dim in proportion to the amount of headlight glare from trailing vehicle headlamps. Within this business segment, the Company also designs, develops and manufactures various electronics features that are additive to the interior and exterior automotive rearview mirrors as well as interior visors and overhead consoles. The Company ships its product to all of the automotive producing regions across the world.

Competition

Gentex is a dominant leader, controlling circa 90% of the market in 2015 with only one palpable competitor (Magna) which is no threat to the company in close future. Hence, the performance of the company as well as stock is highly dependent on its own activity and macroeconomic factors. Being the market leader, the company has a diversified clientele which covers almost all the companies in the carmaking industry.

As we have previously written, due to the growing demand in the US the automotive industry is having a breath of fresh air. All these facts are adding positive signs to already strong income statements of the company, which should generate buzz in the market and help the share price grow.

Source: Made by authors, based on data from Amigobulls

Performance

Having analyzed the fundamental metrics of Gentex and its peer group, we conclude that it is the only company among its peer group and among 23 companies within the whole automotive industry that pay a dividend. The stock’s dividend is currently circa 2,1% (As of November 12). Moreover, Gentex has been increasing their dividend payments during 4 years in a row. They've paid out dividends for 12 consecutive years and have never lowered them, even during the recession.

Net margins have always been stable. The highest decline was in 2008, when it plummeted to 10% but successfully rebounded to the value of 20,1%, which is the highest within automotive industry. The 16-yr average is circa 19%.

Source: Made by authors, based on data from MSN Finance

Considering the P/E ratio of the company’s, we conclude that at the moment it is very close to ones of the competitors.

Source:Made by authors, based on data from MSN Finance

It’s expected that the P/E will decline, but one should pay attention to the fact that the company’s trailing and forward P/E ratios are both significantly below their 5-year averages, which is a good sign. Forward P/E of 14.4 is currently at the low end of its 5-year average.

                              Trailing PE

Source: Reuters.com

                             Forward PE

Source: Reuters.com

Interesting technical observations

  • In the short- and long-term Gentex shares (traded in NASDAQ) show 0,4 correlation with S&P500.

Source: Yahoo Finance

Additionally, it’s expected that S&P will grow 100 points per year. Сonsidering the Gentex correlation with S&P500, the share price will grow following the market.

                                                                    As of September 28, 2015

Source: Goldman Sachs Forecast

  • On days when the market is up, the company’s shares tend to lag the S&P500 index. But on days when the market is down, the shares generally decrease less than index.
  • Over the last 90 days, the company’s shares have been less volatile than the overall market as the stock’s daily price has fluctuated less than the majority of S&P500 companies

Fundamental risks that may influence significantly the Gentex share price

  • Strong dependency upon automotive industry. 97% of the net sales are to customers within the automotive industry. The automotive industry has always been cyclical and highly impacted by levels of economic activity. The current economic environment, while improving, continues to be uncertain (especially in Europe and the Japan and Korean markets, which collectively are larger than North America as shipping destinations) and continues to cause increased financial and production stresses evidenced by volatile production levels, volatility with customer orders, supplier part shortages, automotive plant shutdowns, customer and supplier financial issues/bankruptcies, commodity material cost increases, consumer preference shift to smaller vehicles, where we have a lower penetration rate and lower content per vehicle, and supply chain stresses.
  • Share repurchases. The board consistently repurchases their shares when prices are low. Share repurchase programs were initiated in 2002, 2006, 2008, and 2012. In 2014, the company bought back close to 2m shares. The company still has over 6M shares authorized for repurchase, equating to $84M in cash to be returned to shareholders, so the traders and investors should keep track on the news and market moves caused by the repurchases
  • Insider trading. Since the beginning of the current quarter, sales by Gentex executives have totaled $1,213,271. Over the last 5 years, the average sell total for Q4 has been $4,400,470 which is quite big volume
  • M&As. Management anticipates that acquisitions of businesses and assets may play a role in future growth from 2015 onwards. The company’s pointed out that they can consider merger and acquisition proposals.

Conclusion

We issue a BUY recommendation on the Gentex shares as they are trading at historically low P/E value. Moreover, it’s a dominant player in the market, having 90% of the market shares. It also one of the most financially healthy companies in the industry with almost all ratios better performing than the industry average. It means a stable growth, including by merging and acquiring other companies. But we highly recommend investors consider above mentioned risks.

Disclaimer

We are neither holding, nor planning to open any position. We are merely presenting our opinion, intended to be used in the WhoTrades Investment Strategy Contest.