Gentex Earnings: Higher Volume Finally Returns and Boosts Earnings

Gentex’s GNTX management has long said it needed more volume as the chip shortage ravaged production, and second-quarter results show why. Mirror unit shipments rose 20.8% year over year to a quarterly record of 12.9 million, with double-digit growth for both interior and exterior mirrors. This led to revenue growing 25.9% to a record $583.5 million, which beat Refinitiv consensus, as did diluted EPS, which rose 51.6% to $0.47 versus $0.41 consensus. We are raising our fair value estimate to $38 per share from $35 to reflect higher than previously modeled global light-vehicle production and higher content per vehicle, given that 2023 is progressing above our prior expectation, as well as management raising its guidance. Gentex now expects 2023 revenue of $2.2 billion-$2.3 billion, up from about $2.2 billion, while its gross margin outlook is now 32.5%-33%, up from 32%-33%. 2024 revenue guidance is now $2.45 billion-$2.55 billion, about an 11% increase at the midpoint versus 2023. Previous 2024 guidance was for about a 10% increase from $2.2 billion.

Gross margin is a key driver of Gentex’s results, and the second quarter’s metric of 33.1% increased 140 basis points from the first quarter and 110 basis points year over year. Cost recoveries from automakers for prior input cost inflation came through in the quarter; CEO Steve Downing said recoveries have occurred sooner and been larger than expected. Margin also received help from lower overtime, less freight, better labor productivity from new hires becoming more efficient, and higher revenue leveraging overhead. Management maintains its 35%-36% gross margin goal by the end of 2024, which is an exit rate for the end of the year, not a full-year target. Gentex’s cost-reduction benefits should be more evident to the market as volume keeps rising. We like that management repurchased about 0.9 million shares at an average price of $27.28 in the quarter, as that’s below our fair value estimate.