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Morningstar | Gentex's Second Quarter Sees Some Headwinds, We Are Concerned About Tariff Risk

We do not see anything in Gentex's second-quarter results to necessitate a fair value estimate change. Management did warn about tariff impacts on materials sourced from China, but lowering our 2019 gross margin slightly does not alter our valuation. For the rest of 2018, the company expects $5 million-$8 million of cost increases on U.S. tariffs against China so it is lowering 2018 gross margin guidance to a range of 37.5%-38.5% from 38%-39% previously. We are modeling 38.2% because CEO Steve Downing said on the call that the $5 million-$8 million is a worst-case scenario for the tariffs already enacted; therefore we don't see a need to model the low end of guidance or even below the gross margin guidance.

We do remain worried about further U.S. tariffs imposed on Chinese imports in addition to a protracted global trade war impacting 2019 results worse than management for now expects. President Trump on July 20 reiterated a threat to place tariffs on $500 billion of Chinese exports to the U.S., for example. Outside of cyclical risk and tariff risk, Gentex looks to be in good shape with its balance sheet loaded with cash and about to return to debt free status in the third quarter when the remaining debt from the HomeLink acquisition will be repaid.

For the quarter, diluted EPS matched consensus of $0.40 but a 2.7% revenue increase to $455 million did trail consensus of $467.5 million. The miss came from a 3% decline in larger luxury vehicle production and a fire at Meridian Magnesium Products, a supplier to the likes of Ford and Mercedes, caused about a 1% revenue headwind for the quarter. Ford is all of Gentex's driver assist business, which are higher than average dollar content mirrors. Gentex's overall mirror unit growth remained healthy though, at 8% year-over-year growth thanks to 12% international growth offsetting flat North American volume. Most of this growth is coming from increasing penetration at existing customers' vehicle programs.

Gentex management is participating at the Management Behind the Moat conference held at Morningstar’s Chicago office on Nov. 7-8, 2018. If you are interested in attending the conference, please reach out to your sales representative for registration information.