Weekly Equity Idea Highlight - 2018 12 05
Current market expectations for THRM are overly pessimistic. Markets expect UAFRSadjusted ROA' to decline to 7% levels going forward, while fundamentals are actually
trending positively, pointing to ROA' forecast to rebound to 13% by 2019. The market
appears to be overly concerned about issues around the auto cycle and where total car
volumes are trending, without focusing on the unique opportunity Gentherm has to move
into and expand their business materially in the volume car market, to drive growth even
in a declining marketplace. This opportunity is likely to continue to drive growth, and their
innovation is likely to continue to drive strong returns and differentiation going forward.
In recent calls, management has shown confidence about their outlook for the business to
help validate confidence in this view of the business. Specifically, management has shown
confidence when discussing their plans for boosting revenue and targeting key revenue
growth factors. Even as they've expressed concerns about macro trends for car sales,
confidence about these factors point to reasons to believe market ROA' compression
expectations are too pessimistic.
Considering low market expectations, in terms of pessimism for both growth and ROA',
strong profitability and growth opportunities, and management's confidence about their
outlook for the business, current low equity valuations appear unreasonable, spelling
potential for equity upside.
Gentherm designs, develops, and manufactures thermal management technologies. The company's products provide solutions for automotive passenger comfort, battery thermal management, remote power generation, patient temperature management, and other consumer and industrial temperature control needs. The company has two segments: Automotive, which includes climate comfort systems, automotive cable systems, battery thermal management, and automotive electronic and software systems; and Industrial, which includes the company's remote power generation systems business, its patient temperature management systems business, its environmental testing equipment business and its research and product development division.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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