EUR 850.00 For Business Accounts Only

Morningstar | Gentex Suffers Turbulence in 4Q Results, but Company Remains in a Strong Position

We are not changing our Gentex fair value estimate after the company's fourth-quarter results missed consensus. We don't see a material change to our thesis, and we considered the stock slightly overvalued heading into earnings day. Gentex again suffered from customers negatively revising production schedules once the quarter began, a sign to us that automakers have overestimated demand. President and CEO Steve Downing told us on the call that larger segment vehicles particularly suffered. These production changes cost Gentex $30 million of fourth-quarter revenue, resulting in a total revenue change year over year of negative 1.3% to $453.4 million versus consensus of $480.6 million. Diluted EPS of $0.41 missed consensus of $0.44 and declined 11% from fourth quarter 2017. Tariffs on Gentex's raw material parts coming in from China also took 80 basis points of gross margin, causing that metric to fall by 130 basis points to 37.9%. Other gross margin headwinds came from Gentex unable to get its normal leverage on overhead costs and annual customer price reductions that Gentex could not fully offset, something unusual for the company.

Industry and tariff headwinds plus new price reductions hitting in the first quarter led management to introduce 2019 revenue guidance of $1.83 billion to $1.93 billion, the high end of which was just below consensus. 2020 revenue is guided to grow 3%-8% from 2019 guidance. Downing also spoke of the need for higher research costs to ramp up investment in HomeLink, so 2019 operating expenses are guided to a range of $185 million-$200 million versus about $182 million in 2018. We think Gentex's prospects remain bright but 2019 will likely not be smooth sailing due to tariffs and perhaps more order changes, but its cash-rich, debt-free balance sheet is a nice security blanket. We expect more downward pressure and volatility on the stock from macro issues beyond management's control, but this is a stock we'd love to own at the right price.

These results are not surprising for an auto supplier when the industry is late in the cycle, as we believe the auto industry is in North America, and Brexit headwinds are likely affecting European customer orders. Management would not comment on the impact of a no-deal Brexit, but we think Gentex is better protected from that scenario, though not immune, than other auto suppliers because it gets nearly all its revenue paid in U.S. dollars.

Product news is more positive, with Gentex's full display mirror shipments reaching 390,000 in 2018, up 116% from 2017, and we think management's 500,000-unit target for 2019 may be increased as the year unfolds. The mirror, known as FDM, is on 24 nameplates and another automaker will likely be added in 2019 using Gentex's camera technology. The mirror is now also on the new Toyota RAV4 but Toyota is not using Gentex's camera tech for it. During CES, Gentex also announced a second-generation auto-dimming airplane window product for the Boeing 777X and demonstrated iris identification technology and a dimmable sunroof. These products will not move the needle on revenue and profit for a few more years, but we think they provide a good growth runway for the future as consumers will want these innovative products and autonomous ride-hailing fleets will want biometric technology for customer recognition and e-commerce opportunities.