Gentex Earnings: Optimism on Supply Chain Problems a Good Sign as Volume Matters Most of All

Gentex’s GNTX first-quarter results indicate the firm’s targeted gross margin recovery to 35%-36% by the end of 2024 is on track, and we are leaving our fair value estimate in place. Diluted EPS of $0.42 increased 13.5% year over year and beat the $0.37 Refinitiv consensus. We like management deploying the firm’s cash hoard to repurchase 1 million shares of stock at an average of $27.19 per share, which is below our fair value estimate. Gentex has not increased its dividend since March 2020 but does not plan to consider an increase until net income returns to prepandemic levels ($424.7 million in 2019).

CEO Steve Downing sounded more optimistic on supply chain disruption recovery than we’ve heard in a long time and even said Gentex may slightly beat full-year guidance (which it left unchanged), though he stressed performance depends on how the macroeconomic picture plays out in the second half of 2023. Last minute customer work stoppages from the chip shortage and other supply chain volatility improved for the first time in about two years, which is an encouraging sign. Suppliers have been badly hit from lack of volume due to the pandemic and chip shortage, so more consistent production should, in our view, enable Gentex to unlock its operating leverage and deliver better results than the past two years. This volume enabled revenue up 18% to a quarterly record $550.8 million and good mix with advanced feature mirror penetration of over 70% of Gentex’s 18 net new launches in the quarter.

The company did not get cost recoveries from automakers in the quarter but did in the fourth quarter. Price increases secured recently, plus good volume and less expeditated freight, offset some raw material and labor cost increases and led to gross margin of 31.7%, which is slightly below 2023 guidance of 32%-33%. It’s also down 260 basis points year over year but up 50 basis points from the fourth quarter.