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What Does Jim Simons Think About These Auto Parts Manufacturers

November 28, 2013 | About:
patokehoe

patokehoe

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Jim Simons has been active in the autoparts industry for some time now, making a series of interesting purchases and sales. Tenneco Inc (TEN) and Gentex Corporation (GNTX) are two of the guru’s investment choices worth taking a look at in further detail. These two industry peers have specialized in very different areas, gaining important market share, and technological advantages of rivals.

Emissions controlled, contracts assured [/b]Tenneco sells emissions-control products through its Walker, Monroe, and Clevite brands, that are specifically designed to meet air-quality restrictions. Improvement of fuel economy and engine performance, have been the cornerstone of the firm’s success. Additionally, innovations, such as the tuning of engine sound to an individual vehicle’s profile, have improved revenue streams.

According to analysts at Morningstar, Tenneco should be looking at a 10% average growth in revenue, thanks to new business opportunities. With an estimated EBITDA of over 8 percent, and returns on invested capital surpassing the 14 percent mark, the coming year looks rather positive. The great demand for Tenneco products stems from automotive original equipment manufacturers (OEMs), that need to adapt to global requirements. Thanks to the firm’s large manufacturing footprint and advanced technical research capabilities, Tenneco has been able to establish an important barrier to entry.

Maintaining contracts and strong customer relationships, provide the autoparts manufacturer an additional advantage over newcomers. Long-term contractual obligations, which usually run for around 5 to 10 years, along with agreed upon delivery schedules, are all hard to break. Hence, switching supplier entails a huge cost for customers, especially in terms of time and disruption of production.

In addition to a consolidated customer base, Tenneco's regular technological innovations have enabled the firm to offer OEMs more favorable prices, relative to those of industry peers. Substantial weight reduction, enhanced safety, or reduced cost, are all items automakers are looking for, while meeting regulatory legislation. This is reflected in Tenneco’s revenue growth, and significant gains in cash flow levels, which should further stimulate investments in technological progress. The company, of which Jim Simons recently acquired an important amount of common stock, is certainly looking strong. Although investors must take a 42% price premium into account, I feel very bullish regarding this stock.

[b]Selling for a profit, keeping shares for the long-run
[/b]Gentex was on Jim Simons’ sell list, as he unloaded roughly 29.5% of his holdings in the company. The U.S. firm which originally manufactured smoke-detection equipment back in the 70’s, before entering the interior mirror business, now heavily relies on auto-dimming mirrors to generate revenue. This technology makes up around 98% of total sales, forcing Gentex to come up with new applications constantly, in order to stay ahead of the competition.

The firm has established a $4.3 billion market cap, and positioned itself well for the coming year. A strong financial position, and stock prices rising by 56% YTD, display the company’s growth momentum. The debt-free company has reported great cash flow levels, and promises shareholders a 1.8 percent annual dividend yield. With these great financial prospects, Jim Simons surely wasn’t betting against Gentex, but rather harvesting his returns. The investment guru had bought into the firm at the end of 2012, acquiring an additional 735,900 shares a quarter-year later. After the shares experienced a strong increment in price, the sale makes sense.

Gentex’s fundamentals are quite in order, with over 700 patents, and an 88 percent market share. This gives the company a narrow economic moat, which will not fade in the near future, as it has a lock on its industry niche. The auto-dimming rearview and side mirrors with electrochromic technology the firm manufactures, have great growth projections. Management projects around 45 percent of all cars with interior auto-dimming mirrors will be produced by Gentex, over the next 10 years. OEMs will contribute strongly to this growth, as safety benefits can be achieved by installing this technology in vehicles.

In addition to the automobile business, Gentex is looking at new projects in the office and airplane window segment. The firm recently won a contract with [b]Boeing Co (BA)
, to supply its 787s with auto-dimming passenger windows. With plenty of room to grow, it comes as little surprise that the stock is currently trading at 22.3 times its trailing earnings, entailing a 46.7% price premium relative to the industry average. Despite its hefty price tag, Gentex is a company I feel very bullish about.

Two great long term investments [/b]In the end, both Tenneco and Gentex make for great investments, yet suffer from a price premium investors must be willing to pay. Tenneco is surely the safer option, due to its consolidated customer base, and strong barriers to entry. Long-term contracts, some going beyond 2030, make me feel slightly more bullish regarding this firm. Jim Simons is surely has his sight set on very desirable stocks.

[b]Disclosure: Patricio Kehoe holds no position in any stocks mentioned


About the author:

patokehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.0/5 (2 votes)

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