Gentherm Inc: One Of The Few Undervalued Stocks In Today's Market

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Dec 15, 2014
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Wall Street normally gives the price to a company that it actually deserves (Efficient Market Theory) but at times, due to some event not related to a company's business, it gives an irrational price to the stock. Sometimes this irrationality leads to an overvaluation of the company and at other times it causes a company to become undervalued. Gentherm (THRM, Financial) falls in the later category.

Company Introduction

Gentherm is a leader in manufacturing technology which designs, develops and manufactures heating and cooling systems for diverse global markets. Their products are based on proprietary thermal technology called TED (Thermal Electronic Device). Gentherm's products can be found on the vehicles of nearly all major automotive manufacturers, spanning all major automotive markets. The company's main product is Climate Control Seats (CCS), which was once available only for luxury cars but lately more mid-segment cars are offering it as an upgrade feature. Some of the other products based on TED are as follows:

  • Heated and Cooled Cup Holder
  • Thermal Storage Bin
  • Heated Steering Wheel
  • Heated Door and Armrest
  • Electronic Control Units
  • Automotive Cable Systems
  • Heated and Cooled Mattress

CCS products are currently offered as an optional or standard feature on automobiles produced by Ford Motor Company, General Motors, Fiat Group, Toyota Motor Corporation, Nissan Motor Corporation, Tata Motors Limited and Hyundai Motor Company.

As of December 31, 2013, Gentherm held 432 issued patents, of which 177 were U.S. patents and 255 were non-U.S. patents. As of December 31, 2013, Gentherm had 317 patents applications pending at the authorities, 41 of which were new U.S. applications and 45 of which were new non-U.S. applications filed in 2013.

Gentherm's Moat

Most of my article is focused around CCS because it's the major revenue driver for Gentherm. As I have listed above, Gentherm has some of the top car manufacturers as it's clients. I strongly believe that Gentherm was able to achieve such a strong client base because of their great product, and since they use proprietary technology to manufacture CCS, its difficult for competitors to provide exactly the same product. Also, the following extract from Gentherm's report clearly shows how lengthy the process of approving a new CCS manufacturer can be for automobile companies.

"If a manufacturer wishes to integrate our CCS product into a seat, it provides us with automotive seats to be modified so that we can install a unit in a prototype. The seat is then returned to the manufacturer for evaluation and testing. If a manufacturer accepts our CCS product, a program can then be launched for a particular model on a production basis, but it normally takes two to three years from the time a manufacturer decides to include our CCS product in a vehicle model to actual volume production for that vehicle."

Because of their excellent Climate Control Seats, Gentherm is able to market some of its other products that are based on the similar technology as CCS.

Gentherm's research and development expense in 2013, 2012 and 2011 were $49,873,000, $40,950,000, and $29,733,000, respectively. They have been increasing R & D expense close to 20 percent YoY. This clearly shows they have intention of remaining ahead in the game.

Financial Information

 2011 2012 2013 2014 (Projected)
Debt / Equity 0.24 0.13 0.17 0.17
Cash 24 58 55 65
Revenue 365 554 662 810
Net Income 9.66 17.87 33.82 67
EPS 0.26 0.39 1.00 1.9

Note: At the time of writing, I have data available for three quarters of 2014. I have assumed the numbers for fourth quarter 2014 to be same as those of third quarter 2014.

From the table it is clear that Gentherm management has kept the overall debt to be low in spite of increasing the R & D costs. Revenue has been growing steadily which of course proves that company is getting more and more business YoY. This kind of revenue growth is possible only when Gentherm's clients are well satisfied with the product. It doesn't look like Gentherm has much competitive pressure because their selling and admin expenses haven't increased much from year 2011 - 2014. They have managed to keep their margins steady, which again proves that competition is not fierce.

A Negative Point to Consider

There is one negative that the market sees as a big one, but I personally think this negative has made the stock price of the company unreasonable. Insiders are selling their stock frequently. I believe stocks are a part of compensation of the company's CEO and directors, and they will sell it regularly to meet their financial obligations or diversify their investment portfolio. Insider selling should not be the only reason to not own a stake in an excellent company.

Conclusion

At the current price of $33 a share, Gentherm is trading at 15X earnings of 2014. From the business model and the kind of moat Gentherm has, I believe it will grow at least 25% a year for next 3-5 years. The reason for the belief is that more and more cars are coming up with features like seat heating/cooling, steering heating, cup holder heat/cool system as standard which were once available in top end models or on luxury cars. This will directly benefit Gentherm's top line. Since Gentherm has a strong moat it will manage to keep the revenue growth steady and keep its margins intact. For a company which is bound to grow at 25% YoY, a PE ratio of 15 is too low. I believe it should trade at a PE of 23 which brings the stock price to 43.7 and makes the stock 22% undervalued. If Gentherm is able to achieve 25 percent growth for the next three years, we are looking at an EPS of 4.0 by 2017 which will lead to a stock price of $92 a share. This translates to 178% return in the next three years. Given the current market, it is hard to find such bargains.