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Morningstar | Gentex's Full-Display Mirror Momentum Helps Offset Tariff Headwinds to Start 2019

Gentex reported a solid first quarter despite tariff headwinds, and we see no reason to change our fair value estimate. The company's diluted earnings per share of $0.40 beat consensus by a penny but did receive help from $96.3 million of buybacks, without which we calculate EPS of $0.38. We like that management continues to stick to its plan to be more aggressive in share buybacks over time, whereas prior leadership rarely bought back shares to hoard cash. Still, we prefer buybacks at a deep discount to our fair value estimate, and we were glad to hear CEO Steve Downing tell us on the earnings call that Gentex will buy back stock in a recession due to ample liquidity.

First-quarter revenue and unit volume both grew 0.7% year over year, but this was far better than the global industry's approximate 7% decline in light-vehicle production. Gross margin fell 90 basis points to 36.2%, which was all from tariff headwinds. This performance shows Gentex has an effective team because its customers' annual pricing reductions mostly start on Jan. 1, but Gentex cannot get its own price reductions upstream until the middle of the second quarter. This would normally imply reasons to be optimistic about the rest of the year, but we agree with management's conservative guidance based on its macroeconomic concerns about Europe and China. Gentex's mirrors continue to be the global leader, and we expect that dominance to continue indefinitely; supplier relationships in autos are very sticky due to switching costs from things such as validation tests and long-lived vehicle programs.

Autonomous vehicles not needing mirrors has long been the main threat to Gentex long term. We asked about this on the call and were glad to hear customers are focusing more on electric vehicles and AV programs than mirror replacement because the cost and logistical issues of replacing mirrors is so high.

We also agree with comments that the AV market will probably cause a bifurcation with robotaxi fleet vehicles not having mirrors and personally owned AVs having them to give owners the freedom to drive when they choose. The robotaxi side would of course require regulation changes. Current U.S. mirror laws are from the 1960s, and we expect regulation change to take a long time. We also do not expect human driving to be outlawed anytime soon, so we are not worried about Gentex's future.

Innovation also matters in keeping customers, and the company's full-display mirror is on track to exceed management's 500,000-unit target for the full year, up from about 380,000 units in 2018. The mirror is now on 27 nameplates across five automakers (with four others already under contract), and at least eight more nameplates are coming this year. Management expects the mirror to secure its 10th automaker customer by the second or third quarter. It is encouraging to hear Downing say the product has global appeal across all vehicle classes, not just luxury brands. This matters because the incremental price for an interior full-display mirror versus the customer's prior interior mirror is about $160-$180 per vehicle, per Downing. For perspective, Gentex's full-year 2018 total mirror shipment was about 41.6 million units, with interior mirrors making up about 29.7 million of that.