Gentex (GNTX)

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Gentex Corporation (NASDAQ Global Select Market: GNTX) is the world's largest manufacturer of auto-dimming, glare-reducing rear-view mirrors, with over 14 million mirrors sold in 2007 and a total capacity 25 million mirrors. In 2007, 96% of the company's sales ($156M) were made to auto manufactures, indicating the company's performance is tightly correlated to the overall health of the automotive industry. ^[1] For the first quarter of 2008, automotive sales declined 8.0 percent overall, and 11.0 percent for General Motors, Gentex’s largest buyer. ^[2] The effect of this will become clearer as Gentex reports its quarterly earnings on April 22, 2008.

Only 18% of the nearly 60 million vehicles sold worldwide in 2007, had an interior self-dimming mirror. ^[3] The company estimates that the potential market for automatic dimming mirrors is 50% of the light vehicles produced each year (approximately 30 million) which represents a $3 billion potential market. ^[4] As of April 2007, both houses of Congress had passed an automotive safety bill that sets higher rearview mirror visibility standards. Given that Gentex controls 83% of the market for auto dimming rear view mirrors, a large increase in demand due to the proposed legislation will disproportionately affect the company.

[edit] Business Financials

Gentex sells to many automotive companies, but four each account for 10% or more of their annual net sales (including sales to their Tier 1 suppliers): General Motors Corporation(19%), Daimler AG(15%), Toyota Motor Corporation(13%) and BMW(12%). ^[5] The Company shipped approximately 8,924,000 interior auto-dimming mirrors in 2005, approximately 9,426,000 in 2006, and 11,001,000 in 2007. ^[6] Gentex has strong cash flows from operations which are used to help fund dividends for the company and an excellent balance sheet with no long term debt and nearly $400 million in cash. ^[7]

The following image shows Gentex's revenue vs. operating income for 2007, 2006, and 2005:

Gentex Annual Report^[8]

From 2006 to 2007, revenue increased approximately 14% while the operating income increased only 12%, largely due to the increase in the cost of engineering, research and development expenses. This is primarily due to additional staffing for new electronic product development, including SmartBeam, Rear Camera Display and telematics, and new vehicle programs. For similar reasons, and also because the cost of goods increased from 63% to 65% of net sales did the operating income decrease from 2005 to 2006, despite an increase in revenue.^[9]

The following image shows Gentex's revenue for auto parts (96% of total revenue) divided geographically:

Gentex Annual Report^[10]

The following image shows Gentex's revenue by product:

Gentex Annual Report^[11]

[edit] Key Trends and Forces

• Legislation to require greater safety standards in vehicles: The "Kids Transportation Safety Act of 2007" has been passed by both the United States House of Representatives and the Senate. As of March, 2008 it is awaiting the President's approval signing it into law. If approved it would require "a rearward visibility performance standard that will provide drivers with a means of detecting the presence of a person behind the vehicle in order to prevent backing incidents involving death and injury, especially to small children and disabled people". ^[12] The bill does not state how visibility can be enhanced, however, Gentex controls 83% of the market share and the Company's RCD Mirror is a cost competitive product that is relatively easy to implement.

• Reflective Mirror Market: Gentex is dependent on the condition of the reflective mirror market. It is a small market and Gentex is, as of 2007, in control of 83% of the market share. Any changes in demand for the products, or price changes in the factors of production will affect Gentex's revenue.

• Advancements in non-vehicle sales: In 2005 Gentex opened a contract with Boeing to produce automatic dimming windows for the new Boeing 787 Dreamliner aircraft. The value of this initial contract was worth approximately $50 million over the first five years once volume production begins, with the majority of that revenue attributable to Gentex under the Company's agreement with PPG Aerospace. ^[13] The Company states that production shipments will begin in early 2008.

• Depressed sales for the automotive industry: U.S. auto sales plummeted by 12.0 percent to 1.36 million vehicles in March 2008. Furthermore, sales declined 8.0 percent for the quarter to 3.58 million vehicles. ^[14] The mortgage crisis, rising oil prices , and other factors are combining to lower sales of vehicles across the globe. This poses a risk to Gentex’s sales, 96% of which are to customers within the automotive industry. ^[15] However, despite slumping sales for the major automotive industries, Gentex's North American mirror unit shipments increased by 10% from 2006 to 2007. ^[16]

• Reliance on key customers: Four customers, General Motors Corporation(19%), Daimler AG(15%), Toyota Motor Corporation(13%) and BMW(12%) accounted for 59% of Gentex's 2007 annual net sales. Gentex relies on these companies, and anything that negatively affects them, worker strikes, for example, will lower Gentex's sales and revenue. For the first three months of 2008, General Motors' total sales of 805,720 vehicles were down 11 percent compared with a year ago, but Gentex's quarterly earnings are not available until April 22, 2007. ^[17]

[edit] Competition

Gentex is the leading producer of auto-dimming rearview mirrors in the world and currently is the dominant supplier to the automotive industry with an approximate 83% market share worldwide in 2007, as compared to an approximately 81% in 2006.^[18]

Magna Donnelly is its only significant competition and is supplying a number of domestic and foreign vehicle models with its hybrid or solid polymer matrix versions of electrochromic mirrors. The larger size and more abundant resources of Magna Donnelly are a primary concern for Gentex. Furthermore, Gentex’s core technology was first patented in 1987 and that and successor patents start to expire this year.

[edit] Notes

1. ↑ www.gentex.com Investor Information – Company Profile
2. ↑ autonews.com Auto Sales Plummeted by 12% - Paragraph 1
3. ↑ [Morningstar Report - Paragraph 2]
4. ↑ www.gentex.com Investor Information – Corporate Growth
5. ↑ GNTX 2007 10k – Page 13 – Paragraph 4
6. ↑ GNTX 2007 10k - Page 3 - Last Line
7. ↑ seekingalpha.com Gentex: Investment Thesis – Last Paragraph
8. ↑ GNTX 2007 10k – Page 47 – First Table
9. ↑ GNTX 2007 10k – Item 7 – Page 20
10. ↑ GNTX 2007 10k – Page 47 – First Table
11. ↑ GNTX 2007 10k – Page 47 – First Table
12. ↑ seekingalpha.com Gentex: Investment Thesis – Paragraph 6
13. ↑ GNTX 2007 10k – Page 11 – Last Paragraph
14. ↑ autonews.com Auto Sales Plummeted by 12% - Paragraph 1
15. ↑ GNTX 2007 10k – Page 13 – Paragraph 3
16. ↑ GNTX 2007 10k – Item 7 – Page 20
17. ↑ [ http://www.gm.com/corporate/investor_information/sales_prod/ ]
18. ↑ GNTX 2007 10k – Page 10 – Paragraph 4
19. ↑ - http://www.magnaint.com - Investors - Press Releases