Download REAL CLIENT MANAGED PORTFOLIOS MEMORANDUM

REAL CLIENT MANAGED PORTFOLIO INVESTMENT RECOMMENDATION
TO:
Real Client Managed Portfolio, Spring 2012
FROM:
Nan Liang, Tianbai Wang, and Qi He
SUBJECT:
Gentex Corporation Current Price = $22
DATE:
May 1, 2012
RECOMMENDATION: BUY
Macroeconomic and Industry
The industry growth opportunity generally includes economic growth, demand growth,
government intervention, technology innovation and cheaper currency and competitiveness.
However, there are some key market risk may have critical impact on GNTX as well: economic
activity volatility, fuel and steel costs, and pricing pressures from automotive manufacturers. We
believe the automatic dimming mirror global market only has 2 major players: Gentex and Magna
Mirrors, whose market shares are about 88% and 11% respectively. Gentex is a leading producer and
the dominant supplier to the automotive industry. Magna provides hybrid or solid polymer matrix
versions of electro chromic mirrors. Besides, there are 2 Japanese manufacturers supply a few
vehicle models in Japan with solid-state electro chromic mirrors. And there are a couple of small
Chinese domestic mirror suppliers selling within the domestic China automotive market as well.
However, it seems their products cannot meet global automotive grade specifications currently. In
sum, we believe it’s a duopoly market, and none of the existing competitors can compete directly
with GNTX.
Company Overview
Gentex develops and manufactures high-quality products for the automotive, aerospace, and
commercial fire protection industries that primarily utilize the skills of electronics/microelectronics,
software design /programming/engineering, chemistry, glass coating/fabricating, mechanical design,
and electrical, industrial and mechanical engineering. The main product areas include auto-dimming
rearview mirrors with advanced electronic features, including CMOS imagers/cameras for the
automotive industry, commercial fire protection products for the U.S. market, and dimmable aircraft
windows. The GICS map code is 251010, belongs to Auto Parts and Equipment industry in
Consumer Goods sector.
Financial Analysis and Valuation
Gentex has been sustaining a stable set of Return on Assets and Return on Equity, with
approximately 15% and 13% from 2007 to 2011. Its profit margin declined quickly due to the
economic crisis in 2008 and 2009, and immediately picked up again in 2010, which is 16.87%,
slightly lower than the pre-crisis level. Therefore, it is reasonable for us to predict a declining trend
of profit margin to below 14% in five years. We used the annualized holding period return as Return
on Equity, 4% risk free rate, 6% market risk premium, and since Gentex doesn’t carry on any kind of
debt, we use a combination of ROE and CAPM to come up with 13.95% discount rate, including 1%
risk premium due to company’s business risk. Based on break-down projection of sales and other
items, we finally come up with stock price of $30, ranging from $25.3 to $45.3. In addition, we
projected the DCF in a 10-years horizontal line as we believe that it is not reasonable to predict a
sharp decrease of sales to 3% five years from now, due to the feature of the business.
Recommendation
Our multiple valuation target price ranges from $7-$20, while DCF target price ranges from $25.3 to
$45.3. We recommend buying 200 shares of Gentex(GNTX) at market price.