Since being caught in the crosshairs of a short-seller last July, Gentex Corp (GNTX, Financial) has gone on to post some enviable capital gains. Despite the recovery, value investors may wish to consider the potential for what’s called “a great company at a great price.”
Gentex designs and manufactures products in several niche industries, according to its 10-K for 2017:
- Automatic-dimming and non-dimming rearview mirrors and electronics for the auto industry.
- Dimmable aircraft windows for the aviation industry.
- Commercial smoke alarms and signaling devices for the fire protection industry.
Ninety-eight percent of its net sales are made to the auto industry. Its biggest customers are Volkswagen Group (VOW, Financial), Toyota Motor Company (TM, Financial), Daimler Group (DAI, Financial) and Ford Motor Company (F, Financial). Its main competitor is Magna Mirrors; while there is a competitive threat, Gentex currently has 93% market share worldwide.
This is how Gentex shares have fared over the past 10 years:
Perhaps in response to the short-seller (capital allocation was one of its criticisms), the company announced last month that it would change its capital allocation strategy. The objectives, Gentex said, are to increase the return of capital to shareholders and to continue investing in the ongoing technology evolution. To that end, it will:
- Reduce its cash position from $700 million to $525 million.
- Increase dividends by 10% per year.
- Expend capex of $115 milion to $130 million (as previously announced).
- Repay $78 million of short-term debt in the first three quarters of this year.
- Buy back $425 million worth of its own shares.
To quantitatively assess whether Gentex is a quality company available at a good price, we turn to the Macpherson model (information about the model is available here and here). It uses three sets of criteria to do an initial assessment.
The first set reflects the company’s financial strength and profitability (all data shown from GuruFocus, after the close on April 16, 2018):
The second set provides an assessment of the Gentex moat:
The third set provides an assessment of the company’s valuation (positive values show the existence of intrinsic value and a margin of safety; negative values do the opposite):
The GuruFocus system says Gentex is more suited to earnings-based Discounted Cash Flow (DCF). The earnings-based DCF has a 52.2% margin of safety.
Other financial data (data from the Gentex Dashboard, April 16, 2018):
- Revenues: Since January 2009, revenues have grown faster than the share price. The three-year growth rate is 10.10%.
- Margin: The operating margin is 29.16% and has generally grown since 2009.
- EBITDA: The three-year Ebitda (earnings before interest, taxes, depreciation and amortization) growth rate is also 10.10%.
- Dividends: 10 cents per share for the fourth quarter of 2017. The yield is 1.68%, and the payout ratio is 28%. The dividend should increase this year because of the new capital allocation strategy.
- Buyback ratio: 1.3%, and going up, as noted above.
- Beta: 1.27, so the stock is not significantly different than the S&P 500. This means it will be affected by swings of the broader market.
Ownership: Twelve of the gurus followed by GuruFocus have positions in Gentex. The three with the biggest holdings are Chuck Royce (Trades, Portfolio) with more than 4 million shares; Columbia Wanger (Trades, Portfolio) and Jim Simons (Trades, Portfolio) are second and third, with 986,000 and 900,000 shares respectively.
Of the trades made in the fourth quarter of 2017, five were buys or additions, while seven were reductions or sell-outs.
Institutional investors have a strong interest in Gentex, holding 89.22% of the company's shares. Insiders held 2.31%, and their positions have grown slightly over the past three quarters.
And, as this chart shows, short interests have been in retreat:
The analysts followed by NASDAQ.com have a slight bias to the bullish side:
Looking ahead, Gentex should do well over the next three to five years. It faces competition in its biggest segment from Magna Mirrors, a subsidiary of Magna International Inc. (MGA, Financial). With a market cap of nearly $22 billion, compared to Gentex’ $6.6 billion, it has the financial weight to increase its competitive presence. Nevertheless, Gentex had a 93% market share in 2017, so it's likely to be the strongest contender for some years to come.
It also continues to invest in new products and improvement of existing products, thanks to nearly $100 million spent on engineering, research and development in 2017. It has spent around 6% of net sales on research and development, and presumably that will increase with the new capital allocation plan.
And, as seen in the moat table above, the company has posted strong numbers for return on capital and return on tangible equity. This means it should be able to maintain its pricing power for at least several years.
Behind all this, though, is a cyclical auto industry. It is the source of 98% of Gentex’ revenue, and its fortunes will rise and fall with auto production.
Finally, the company has had $700 million of cash on its books and while Gentex will reduce that to $525 million, it’s still a hefty fortune, especially when taken in conjunction with an absence of long-term debt.
Conclusion
Gentex Corp. has apparently slain most of the short-sellers who expected its share price to plunge.
That leaves it free to focus its energies on growing its business by further developing its existing products and creating new products that extend its range.
For value investors, Gentex is worth a solid look. It has no debt and meets the other criteria for a quality company (subject to further due diligence). The moat is strong, and likely will hold for at least another three to five years.
Surprisingly, it also shows up as an undervalued stock, with a 52% margin of safety (based on the default settings of the GuruFocus calculator).
All things considered, this a good company with a good valuation that should get the attention of value investors.
Disclosure: I do not own shares in any companies listed, nor do I expect to buy any in the next 72 hours.
