With Gentex Corporation (Gentex) we are presenting to you another holding of the Europa One fund, for which we act as the investment advisor. The company stands out thanks to strong growth rates and an attractive valuation. Gentex is a global, high technology electronics company. Its competencies encompass integrated highly automated electronics, CMOS camera development and manufacturing, vacuum coatings, and glass bending and fabrication. Gentex delivers its products to the automotive, aerospace and fire protection industries.
Gentex was founded in 1974 as a manufacturer of high-quality fire protection products. The companys founder Fred Bauer still serves as Chairman of the Board and Chief Executive Officer all the while remaining a major shareholder of the company. In the 1970s, he single-handedly revolutionized the fire alarm industry with the world's first dual-sensor photoelectric smoke detector - a device less prone to false alarms yet quick to detect slow, smoldering fires. Gentex is best known, however, as the pioneer of the electrochromic, automatic-dimming mirror industry allowing the elimination of dangerous rearview mirror glare. This was achieved when, in 1982, Gentex introduced the world's first electromechanical (motorized) auto-dimming mirror. The product was so revolutionary that it was adopted immediately by Ford and General Motors in great quantities.
Nowadays, Gentex main product areas include auto-dimming rearview mirrors with advanced electronic features, including CMOS imagers/cameras for the automotive industry, commercial fire protection products for the U.S. market, and dimmable aircraft windows. This provides the company with a very important degree of diversification in its revenue stream and at the same time growth potential.
Gentex ships ever more mirrors (36.1m units in 2016) year after year in a market where the penetration of auto-dimming mirrors (based on the employment of electrochromic principles) is still below 30% relative to global car sales. This leaves an extensive amount of growth potential for years to come. In addition, mirrors in automobiles are becoming ever more sophisticated through the addition of a variety of features, such as displays, sensors and transceivers, telematics, driver interfaces, microphones, lightning and signals or rear vision systems.
As shown by the following chart, Gentex revenue growth has been strong and is projected to remain at a pace of around 10% per annum through 2019. It should be mentioned, however, that the company has a history of outperforming analysts revenue growth projections. For example, in Q1 2017, growth in net sales yoy came in above expectations at 12%.
At the bottom line, the first quarter was even more impressive. Net income was up by 22% yoy with earnings per diluted share up by 18%.
- Run by founder and main shareholder providing best possible alignment of interest between senior management and shareholders
- EPS growth in high teens
- Technology leader
- Extremely strong market position
Potential Risks and Weaknesses
The potential risks for Gentex are of a long-term, structural nature. Autonomous driving, once it comes to market, may reduce the need for mirrors substantially, albeit it will not eliminate it entirely because people still have to be able to drive the car in the event of a system failure. In the meantime the company is firing on all cylinders as it is now also expanding into China with three products: mirrors, parking spot barriers and garage doors. Lastly, Gentex is well-positioned in the all-important sensor technology, which will help the company maintain growth.
As shown by the following chart, the consensus target price for Gentex share has increased continuously since the beginning of 2016. We expect this trend to continue.
With a forward 2018 PE ratio of 13.8x the companys valuation is clearly inexpensive given the underlying growth numbers and market position. Therefore, if Gentex is able to maintain earnings growth in the mid to high teens, the stock should rise at the same rate over the medium to long term. Assuming 15% annual growth and share price appreciation yields a price target of 26.2 USD (+32%) in two years time.
Disclosure: The UCITS investment fund Europa One, for which we act as an advisor, currently holds shares in Gentex.
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Designs, develops, manufactures and supplies automotive and fire protection productsGentex Corp. designs, develops, manufactures, and markets electro-optical products for the automotive, commercial building, and aircraft industries.Its revenue is derived from the production and sales of automotive...