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Gentex: Growth Through Niche Markets and Smart Acquisitions
Posted by: Victor Selva (IP Logged)
Date: April 2, 2014 03:44PM
The auto parts industry is well known for its harsh competitiveness. However, the best way to be a strong player in this industry is to have a niche market in which your company is infallible. This is the case of rearview mirror manufacturer Gentex Corporation (GNTX), an auto parts supplier with total 2013 sales reaching $1.2 billion.
Gentex is the biggest manufacturer of automotive automatic-dimming rearview mirrors in the world, and recently began production of dimmable windows for the aerospace industry. The company also manufactures automotive rearview mirrors with electronic features. With 88% of the global dimmable rearview mirrors market, this company is surely a great investment opportunity.
Great Prospects for the Near and Long Term
In 2012, the firm estimated that 24% of all cars had auto-dimming rearview mirrors. Management even projected that for the following 10 years, the market share of dimming mirrors for the automotive industry would increase to 45%. This should be achieved as OEMs must better the safety standards of its manufactured vehicles. Thus, Gentex´s available technology should increase its vehicle penetration and become standard products for the automotive industry.
Furthermore, the firm expanded its production towards the aerospace industry. Gentex was actually one of the first companies to manufacture dimmable aircraft windows. Along with the aerospace business segment of PPG Industries Inc. (PPG), the firm won a contract to supply Boeing Co. (BA) and Beechcraft. Last year’s sales for this segment increased 62%, indicating a growth rate of 56% in the dimmable aircraft window sector in just one year.
Gentex Will Maintain Its Narrow Economic Moat
The company holds a narrow economic moat, stemming from its efficient scale and the high customer switching costs in the niche market it operates. In addition, technological innovations such as SmartBeam, a technology that automatically turns the brights on, along with other patents, have put Gentex ahead of its competitors.
Furthermore, the fact that the company’s market share increased from 85% to 88% in recent years, demonstrates that there is no reason for customers to switch to rivals such as Magna International Inc. (MGA). Gentex’s technological innovation and its product quality should ensure the firm maintains its market share and economic moat.
New Acquisition Is Expected to Increase Profits
In September 2013 Gentex completed the acquisition of HomeLink for $700 million. HomeLink is a home security management system that can be controlled from a vehicle, a technology previously owned by industry giant Johnson Controls Inc. (JCI).
This new product is compatible with 99% of door opening systems, and the Gentex has been working for about 10 years in integrating this technology into its auto-dimming rearview mirrors. The huge advantage of HomeLink is that it can be applied to all major auto brands. Thus, this acquisition was an intelligent move, as it is projected that for a five-year period the ROIC will be around 20%.
A Great Investment Opportunity
Gentex is currently trading at a price premium relative to the industry average. However, the firm is still worth investing in. As can be seen in the following chart, the firm´s revenue and net income have shown a clear upwards tendency in the past years and the company is expected to stay on this growth path. Moreover, the rising tendency in Gentex´s free cash flow indicates it can achieve a solid financial performance in the long term.
With a fair operating margin of 26% after the acquisition of HomeLink, Gentex has a bright future ahead, where new investments should be made to enhance shareholders profit. The company´s ROE of 16.79% is also a good indicator that shows us what a great investment opportunity Gentex is. In addition, the revenue growth rate of 11.90% should ensure increased revenue for the following five years. Furthermore, investment gurus such as Joel Greenblatt (Trades, Portfolio) have also been purchasing the stock with great optimism. Hence, I feel very bullish regarding Gentex’s future and see no reason to think otherwise apart from the price premium.
DIsclosure: Victor Selva holds no position in any stocks mentioned.
Stocks Discussed: JCI, MGA, BA, PPG, GNTX,