Stokeley Griffin, CFA, CAIA

tyler_griffin@kenan-flagler.unc.edu

Gentex Corporation (NASDAQ: GNTX)

Recommendation: BUY
Date of Analysis: 10/30/2022

Current Price: $26.28 Market Cap: $6.2 B Enterprise Value: $5.8 B

52-Wk High/Low: $37.90/23.28 Dividend Yield: 1.83% 1 YR F P/E: 12.5x (Morningstar)
Target Price: $33 Share O/S: 235.1 M TTM EBITDA Margin: 26.4%
TP Upside: 26% Avg Daily Vol: 1.8 M TTM ROIC: 19.2%

Gentex Corporation (GNTX) is unlike typical auto suppliers. GNTX dominates the auto-dimming mirror industry globally with over
90% market share. I estimate that GNTX’s market share of all auto mirrors globally to be 18.5%. GNTX is revolutionizing rear-view
mirrors by enhancing them with premium features that go beyond dimmable mirrors, such as blind spot indicators, rear-view
camera displays, and integrated tolling modules. GNTX has a fortress balance sheet with no debt. 2% of sales consist of fire
protection equipment and dimmable aircraft windows.
Investment Thesis: ____________________________________________________________________________________________
• Market Underappreciates GNTX’s Moat: GNTX invented the auto-dimming mirror in the 1980s and GNTX’s emphasis on
innovation through new features and product development creates a durable competitive advantage (66 new product
introductions in 2Q, for example). GNTX’s average selling prices have been consistent due to new product introduction and
value-added content, as well as new content penetration in new vehicle models. GNTX outspends its competitors by a wide
margin (Magna spends between 1% and 2% on R&D across different product lines, whereas GNTX spends 4% to 6% of sales
exclusively on mirrors and related products). The market is pricing GNTX like other auto suppliers, skeptical of the
sustainability of their moat. ROICs are consistently in the high teens in down years and exceed 20% in normal years with a
decades-long operating history.
• Auto-Dimming Mirror Penetration to Accelerate: Auto-
dimming mirrors are set to take further share from basic
non-dimming mirrors for three key reasons. Electric
vehicle (EV) adoption is the greatest catalyst. GNTX sells
twice as much content per EV as GNTX does for ICE
vehicles. Increasing content per vehicle plus higher
average selling prices for EV models creates tailwinds for both revenue and margins. In the near-term, vehicle production is
set to recover (a gap of 20 million vehicles globally from the peak), while supply chain pressures weaken, leading to reduced
margin pressure (36% gross margin on average pre-COVID from 30% last quarter). Interior penetration remains low (10%)
and this will change as rearview displays incorporating connected technology and cameras gain traction.
• Discounted Multiple at Discounted Earnings: GNTX is trading at an extremely attractive multiple (12.5x forward earnings)
compared to its history (16x average over the past five years). Given the lack of appropriate comparable companies, GNTX’s
historical multiple is used as a guide.
Valuation: __________________________________________________________________________________________________
• Price Target of $33 (Bull Case of $43; Bear Case of $21)
• Base Price Target is based on IHS Markit’s global light vehicle
production forecasts, projected auto-dimming mirror penetration
rates for exterior (10% to 16%) and interior (31% to 35%), EV
adoption rates from market experts, and long-term growth rate of 2%.
• Multiple used is the five-average EV-to-EBITDA (12.2x).
Risks: _________________________________________________________________
• Technological Obsolescence and/or IP Theft: GNTX’s moat is built on unique features and chemistry. Patent protection is a
mitigant (>2,000 patents), along with industry-leading R&D spend, incumbent privileges (ROFR), and vertical integration.
• Vehicle Demand: If vehicle demand is persistently sluggish or if ride sharing reduces the need for cars in the future, the
sales of mirrors will decline as a result. The difference is whether the demand shift is temporary or structural.
• Cameras Replacing Mirrors: While GNTX has built its name as the go-to provider for high-end electronic rearview mirrors
for automobiles, cameras are slowly being adopted. GNTX also offers premium camera technology and cabin monitoring
features. Mirrors are a low-cost failsafe product ($40 average selling price per mirror versus $436 for average parts).