Gentex Needs a Change
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Based in metropolitan Grand Rapids, Michigan, Gentex (NASDAQ: GNTX) was founded in 1974 and is known for its auto-dimming rear view mirror technology. At the end of fiscal year 2012, Gentex held 88% of the market share in the auto-dimming mirror industry, and has not had to worry about the emergence of potential threats in this near-monopolistic industry. This auto-dimming mirror division also consists of Gentex’s patented Rear-Camera Display technology, or RCD - a proprietary technology that allows a driver to see behind them by utilizing a display in the rear view mirror, and has been a key contributor to Gentex’ success in recent years.
In 2008, The Kids Safety Transportation Act was signed into law, requiring all new vehicles under 10,000 pounds to be equipped with cameras and rear camera displays by September 2014. For Gentex, this announcement was expected to be a home-run for its RCD technology, but five years later and the absence of federal mandate on the act has since prescribed a myriad of potential threats to Gentex’s large market share.
At the time of announcement, Gentex was one of the only companies in the world that would’ve been able to offer immediate compliance, but after four delays and a request for a fifth one, the lack of federal mandate has allowed many competitors to catch up with competing technologies
What Gentex must do
In the 10Q from Gentex’s most recent quarter, the company estimates that Rear Camera Display Mirror unit shipments will decrease approximately 25-35% in calendar year 2013 compared with calendar year 2012. Additionally, four customers have notified Gentex that they have selected a radio display in the center console as the primary location for the rear video display application.
The popularity of liquid crystal displays, or LCDs, for radios and other controls in the center console has shifted customers away from Gentex. Due to the delay of the final publication and shift in consumer preference, other competitors and substitutes have entered the market, and if Gentex wants to maintain and even grow its interior mirror segment, it must make changes soon.
My primary recommendation is to move the rear-view display into the in-dash console of the vehicle. Studies have even shown that consumers prefer the displays in the center console compared to the rear view mirror, and The Alliance of Automobile Manufacture’s estimates that this will be a $2-3 billion industry in the next few years.
Gentex already has a partnership with Johnson Controls (NYSE: JCI) to develop most of its electronics functions, and in July, bought a portion of its Homelink electronics product line. This deal is expected to boost its annual revenue by $125 million to $150 million, and while it was a step in the right direction for Gentex, there is still work needed to be done.
Johnson Controls, however, still plans to find a buyer for the rest of its automotive electronics business by the end of September - something Gentex should consider given the aforementioned recommendation. The company has a strong focus in lithium-ion battery technology and has a new contract with the U.S. Department of Energy that investors should keep tabs on. If Johnson Controls continues its track record of creating innovative automobile electronics, this stock could be an excellent equity to own for the long-term as well.
My secondary recommendation is for Gentex to make a lower cost alternative. Gentex has always had a niche for creating products that are perceived higher in value by default. However, this perceived value has been falling substantially ever since manufacturers started to prefer the camera displays in the center console, and started seeking lower cost alternatives, making this a very viable option to consider. Since Gentex already allocated nearly 8% of all revenue towards research and development, it could figure out ways to become more efficient in its business processes to achieve this recommendation.
Gentex' largest competitor, Magna International (NYSE: MGA), recently recorded a record high stock price, and has been on a continuous uptrend since it entered the automotive mirror industry. Although the company only makes up 11% of the market share compared to Gentex's 88%, it has a more dominant international presence, making it a considerable threat to Gentex in the near future. The company also offers a much more diverse product line than Gentex and 8 analysts rate Magna International a buy given it's current circumstances.
Gentex's ability to manage its long term relationships with automakers and leave them satisfied has been the company’s key to success for many years. It is my belief that the recommendations herein will position Gentex to meet the changing customer demands while utilizing the strengths that Gentex already possesses. If Gentex does not follow these recommendations, it could very well fall behind the competition in its industry and lose its near-monopolistic position in the mirror industry.
With the U.S. relying on the rest of the world for such a large percentage of our goods, many investors are ready for the end of the "made in China" era. Well, it may be here. Read all about the biggest industry disrupters since the personal computer in 3 Stocks to Own for the New Industrial Revolution. Just click here to learn more.
Chris Johnson has no position in any stocks mentioned. The Motley Fool recommends Gentex. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!