Gentex’s First Quarter Shows Pricing Pressure but also Strong Expense Management

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Gentex reported first-quarter results that beat consensus ($0.32 EPS versus $0.30 expected). However, guidance for second-quarter revenue, of a year-over-year change that is flat to down 5%, came in below consensus.

Analysts see excellent expense management thanks to Gentex’s previously announced initiatives to stop outsourcing some R&D work as well as purchasing cost reductions. The depression in European auto volume eventually will improve and these cost reductions, along with SG&A cuts in overseas offices, should help Gentex modestly expand its margins over our five-year forecast period.

Europe, Gentex’s largest market, is not likely to improve this year, so this weakness and annual price reductions from customers will likely mask the true impact of management’s cost-cutting efforts in 2013. The stock may stay pressured for some time as average selling price is down significantly to $40.95 from $43.88 in the fourth quarter. This data point indicates that customers are not paying up for advanced features, or shows the impact of a mix shift toward lower priced exterior mirrors and base-level interior auto-dimming mirrors.

First-quarter 2013 gross margin was flat versus first-quarter 2012 at 34.7%, but R&D expense declining 110 basis points as a percentage of revenue, along with a 10 bps decline in SG&A year-over-year, drove operating margin up 120 bps to 23.7%. Management guided in its fourth-quarter press release that first-quarter 2013 gross margin would decline sequentially; instead, mix and purchasing cost reductions, partially offset by price reductions to customers, increased gross margin by 50 bps from fourth-quarter 2012.

Gentex retained its 2013 guidance on SmartBeam unit volume increasing 10%-15% from 2012 and for RCD mirror volume to decline by 25%-35% from 2012. We do not expect RCD volume to rebound since the industry appears to be moving more and more toward RCD in the vehicle’s center console. Revenue from fire protection and airplane windows increased by about 30% year-over-year to $6.5 million thanks to an increase in window volume. We would like to eventually see this business reach scalability so that Gentex can diversify outside the auto industry.

Gentex’s cash hoard grew by an impressive 15.1% from December 31 to $518.5 million, or $3.62 per diluted share. In addition to the cash balance, the company reported another $1.31 per share in investments and other assets. The company increased its annual dividend by about 8% earlier this year but the cash is likely to keep piling up unless Gentex pays a special dividend, repurchases its shares, or makes an acquisition. None of these three events has a high probability of occurring, in our opinion, since management highly values a strong cash cushion to protect against event risk and to give Gentex’s suppliers assurance that they will be paid.

 

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