Gentex SWOT Analysis: No Dim Future

Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the simplest ways to get an overview of a company's operations is through a SWOT analysis.  Here the main strengths, weaknesses, opportunities, and threats of the company are laid out for all to see.   Having been given a 44% haircut in stock price this year, we will take a look at auto-dimming rearview mirror maker, Gentex Corporation (NASDAQ: GNTX), and see if their future is any brighter.

Strengths

  • 21 Automakers (and growing) currently use one or more variations of the auto-dimming mirrors.
  • Innovation:  Developed new SmartBeam Dynamic Forward Lighting in 2012, along with high beam assist, driver warning systems, and Rear Camera Display mirrors.
  • Basic Monopoly on auto-dimming mirrors with an 88% market share.
  • No debt, a solid balance sheet, and a profit margin of 15%.

Weaknesses

  • Low moat:  98% of revenues come from automatic-dimming rearview mirrors.
  • Reliant upon innovation to drive future growth in the rearview mirror market.
  • 20% of employees work for the Research and Developement Team; often takes years for these investments in technology to pay off.

Opportunities

  • Growth in emerging markets: Asian and Western Europe markets are still largely undeveloped for auto-dimming mirrors.
  • Penetration rates for auto-dimming mirrors sit below 50% and 30% in North America and Western Europe respectively; Even lower in Asia at slightly less that 10%.
  • Rear Camera Display Mirrors (RCD's): All new cars made in America may potentially be required to have RCD's by December 2012; Currently sold to 10 Automakers.
  • New product lines in SmartBeam headlamps and auto-dimming windows for aircraft; Higher margin product lines could help fuel a future growth story.

Threats

  • 45% of auto-dimming mirror unit shipments are to Europe.
  • Growing number of competitors; Private companies like Ichikoh Industries produce similar mirror-related products and Magna International (NYSE: MGA) is its only competition traded on an exchange.
  • Magna has larger cash flows than Gentex and could prove to be a true competitor as it is the second largest producer of internal and external mirrors.
  • Pricing: Increased competition could lower prices and lead to depressed margins over the long term.
  • Gentex is directly tied to a cyclical and volatile world in regards to the auto industry.
  • In-dash Rear Camera Displays may be more popular with automakers, versus the rearview mirror displays Gentex offers; stock price recently took a hit on this news.

Foolish Final Considerations

With the SWOT analysis presented, Gentex can clearly be seen as the industry leader in auto-dimming rearview mirrors.  With future growth stories in its SmartBeam headlamps, Rear Camera Displays, and a movement towards new global markets, Gentex still has a lot to prove-- and possibly accomplish.

Trading with a PE of only 14 and a Price/Cash Flow of 11, Gentex has a lot to offer, as it is trading well below its historical averages and sports a generous 3% dividend.  While Magna may have lower and more appealing valuations, it struggled more than Gentex during the recession and doesn't have the true growth runway that Gentex does.  Holding a fair Payout Ratio of only 43% and a healthy Cash Flow, I am adding Gentex on CAPS with a 5+ year pick and will keep a close eye on it for my portfolio.


Fool blogger Josh Kohn-Lindquist does not own any of companies mentioned in this entry, long or short. The Motley Fool owns shares of Gentex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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