Gentex Q3 Revenue Below Estimate, Shares Recover After 11% Fall (GNTX)

Reacting to a decline in fiscal 2012 third-quarter net income and concerns over the existing volatility in the European market, the shares of Gentex (NASDAQ: GNTX) plunged by 11% in the first hour of trading before retracing most of its losses.

The Michigan-based company manufactures electro-optical products for the automotive, commercial building and aircraft industries. Gentex’s main product line includes automatic dimming rear-view mirrors, smoke alarms and dimmable windows. The company has over 700 patents worldwide and more than 300 patent applications remain pending.

The net sales for the third-quarter of 2012 declined to $268.2 million from $269.5 million in the corresponding period of 2011. The revenue estimate of analysts was $277.63 million for the third quarter.

Net income for the reported quarter was $41.9 million, or $0.29 per share, compared to $43.4 million, or $0.30 per share, in the third quarter of 2011. The earnings per share beat the Capital IQ Consensus Estimate of $0.28 per share.

The company’s size has almost doubled in terms of revenue in the past three fiscal years, from $544.5 million in 2009 to $1.02 billion in 2011. Net income has increased to $164.67 million in fiscal year 2011 from $64.64 million in fiscal year 2009. Reflecting the performance, the share price rose from $7.21 in March 2009 to $30.89 in January 2012. The slide in share price began at that point.

The fiscal 2011 fourth-quarter revenue and income fell short of analysts’ estimates resulting in a fall in the share price to $26.87 on January 31, 2012. The postponement in the issue of an auto-safety rule, which will necessitate rear-view cameras in all vehicles, until December 31 pulled the stock price of Gentex further down to $23.65 on February 29. The company commands a 95% share of the rear-view camera market. On April 19, Gentex reported fiscal 2012 first-quarter revenue of $290.71 million, which once again disappointed the street consensus and led to a decline in the share price to $20.89 on April 24. The saga continued in the fiscal 2012 second-quarter as well, with reported results being below expectations owing to a cut in the product prices that affected the margin. By July 26, the share price of Gentex touched a new 52-week low of $14.38. The stock price, which recovered to $17.96, met another resistance in the form of a downgrade by “The Street” from “buy” to “hold” on August 15.

Gentex believes that it has great future prospects considering the fact that only 23% of vehicles sold annually worldwide have an interior auto-dimming mirror. A conservative 45% penetration calculates to $3.4 billion worth of products waiting to be sold. Currently, the top five customers each account for 10% of the company’s revenue. The auto-safety rule that warrants a rear camera display in every vehicle is expected to boost the fortunes of the company tremendously. The company has zero debt and around $560 million in cash and investments. The company has never reported a full year loss in the past decade. Before the third-quarter results were out, a Seeking Alpha report published today recommended Gentex as a long-term investment opportunity.

Gentex CFO Steve Dykman provided the guidance for the upcoming quarter. The CFO anticipates approximately flat net sales for the fiscal 2012 fourth quarter compared to the same period last year. The company reported fiscal 2011 fourth-quarter sales of $260.34 million. The consensus estimate of Capital IQ is $273.03 million for the fourth quarter.

The company completed the repurchase of 28 million shares under the authorized repurchase plan that was initiated in the year 2003.  During the third quarter, Gentex repurchased two million shares. Under the existing terms of the repurchase program, the board of directors authorized an additional repurchase of up to four million shares of the company’s outstanding common stock. Gentex will execute the share repurchase with the available cash.

Commenting on the results, Gentex Chairman and CEO Fred Bauer said, “We are also pleased to illustrate the positive efficiencies we are experiencing within our operating expenses. Our Engineering, Research and Development expenses declined primarily due to a concerted effort to reduce costs related to outside contract engineering development services as a result of better utilization of our own employees’ talent.”

With regard to the situation in Europe, Fred Bauer said, “As is widely known from recent news headlines, the European markets are increasingly uncertain and are becoming more volatile. As a result, we have more downside risk for any products that we’re shipping to customers in Europe.”

Approximately 45% of Gentex’s total mirror unit shipments were to Europe, with a high percentage of high-value, advanced-feature products.

The caution issued by the company resulted in a fall of more than 11% in the initial hours of trading. However, being a market leader with more than 88% market share in some segments, Gentex quickly erased all its losses as traders saw a buying opportunity.

Gentex ended the day at $17.17 per share, down $0.07 or 0.4% on a volume of 5.01 million shares.

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Published by Steve Hackney

Steve Hackney is a corporate finance professional with over 14 years of experience in cash management and investing. He earned a Bachelor of Science in Finance from Florida State University and holds a Certified Treasury Professional certification. Steve lives in Orlando, Florida with his family.