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Gentex Earnings: Easing Supply Chain Woes a Huge Profit Booster While Vendor Battle Begins

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Gentex’s GNTX third-quarter showed efforts to improve gross margin are paying off as volumes recover and give us no reason to change our fair value estimate. We believe the stock’s 7.4% selloff on Oct. 27 is not warranted and was probably exacerbated by the Dow Jones Industrial Average’s nearly 400-point decline that day or heavy selling in GM and Ford. Diluted EPS of $0.45 rose by 45.2% year over year and beat the $0.44 Refinitiv consensus, while unit volumes and revenue growth rates once again easily outgrew industry light vehicle production by 500 and 1,200 basis points, respectively. Management confirmed guidance for 2024 revenue of $2.45 billion to $2.55 billion and kept 2023 revenue and gross margin guidance in place.

Gross margin is the key driver of Gentex’s results and closely watched by the market, so it is good to see easing supply chain issues leading to more cost leverage. Volume growth, along with improved freight costs and realization of price increases and cost recoveries from some customers, enabled gross margin to rise by 340 basis points to 33.2% and by 10 basis points from the second quarter. Operating margin increased year-over-year by 370 basis points to 21.3%. Further gross margin gains should come from less scrap as recently hired workers gain more experience, overtime declines as labor shortages are abating for hourly workers (but not for software engineers), and improving supply chains enable more volume. These variables mean management maintains its 2024 gross margin exit rate target of 35%-36%.

Gentex announced a program to improve materials costs for late 2024-26. Starting now, Gentex is aggressively seeking price renegotiation with about 20 electronics providers and 10 commodity vendors to combat what it sees as unreasonable continued price hikes by vendors despite improving supply chain conditions. If vendors do not cooperate, Gentex will terminate all or major pieces of its procurement with that firm and source elsewhere or internally.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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David Whiston

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007.

Before Morningstar, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner. In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011.

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