Thu May 01 2014
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Gentex: In the Passing Lane

One thing Jim Fink, chief investment strategist of our small-cap-focused Roadrunner Stocks advisory, likes to see when picking stocks is a company founder in the corner office.

“Founder CEOs are entrepreneurs who passionately want to create a business, not just collect a paycheck” Fink wrote in an April 23, 2013, Investing Daily article. “They are often compensated with stock, not borrowed cash, which aligns their financial interests with the average shareholder and makes these companies much more shareholder-friendly than the bloated behemoths in the S&P 500.”

A number of studies back up Fink’s preference. Fortune magazine, for example, documented the tendency of founder CEOs to outperform their counterparts in a 2006 article:

“Twenty-six Fortune 500 companies boast founder CEOs,” wrote the magazine at the time. “The stocks of these 26 companies returned an average of 18.5% annually from year-end 1995 through 2005, which is seven percentage points better than the Fortune 500’s average return over the same period. Their profit growth has been superior, too, increasing at an average rate of 19.6% a year from 1995 to 2005, vs. 11.7% for the Fortune 500.”

Moreover, a 2007 study found that “founder CEO-led firms not only have a higher firm valuation than non-founder-CEO firms but also a higher stock market performance. Furthermore, they undertake more acquisitions in their core business and invest more in R&D and capital expenditures.”

Gentex: Founder-Driven

One founder-run firm Fink likes is Michigan-based Gentex Corp. (NasdaqGS: GNTX).

Gentex opened its doors in 1974, when Fred T. Bauer, the company’s founder, current CEO and chairman of the board, started it up as a maker of fire-protection products. That year, Gentex introduced the world’s first dual-sensor photoelectric smoke detector, which was less prone to false alarms than competing products but still quick to detect slow, smoldering fires.

Bauer has been Gentex’s chief executive since 1986. Today, the company has offices in Germany, Japan and China and continues to make commercial fire-detection products. But it’s mainly known for its auto-dimming car mirrors, which reduce glare from following vehicles. Gentex dominates this market, with an 88% share.

The company also sells other car-safety systems, like rear-camera displays (RCDs) and its SmartBeam headlamp technology, which automatically decides whether a car’s headlamps should be on regular or bright power. This system improves safety in two ways: by reducing the glare of bright lights on busy streets and by improving nighttime visibility on quieter roads.

Aircraft Window Business Taking Off

Gentex has used its auto-dimming expertise to develop windows for passenger and business planes. The company’s windows, which it began delivering in 2010, are in the Boeing (NYSE: BA) 787 Dreamliner and the Hawker Beechcraft 350i corporate jet. They replace the pull-down shades that are standard on most planes and can be controlled by both passengers and crew.

In addition to giving the cabin a cleaner look, the technology reduces ultraviolet and infrared radiation, making the plane’s heating, ventilation and air conditioning systems more efficient.

As with auto-dimming mirrors, Gentex has a strong lead in this market: according to the company’s 2013 annual report, its dimmable aircraft windows are the first product of their type for original equipment installation in airplanes. Last year, sales rose 62% over 2012.

This business should continue to grow along with global aircraft sales: according to figures from Boeing, $ 4.8 trillion worth of new passenger and cargo jets will be sold over the next two decades, as travel demand rises and airlines upgrade to new, more fuel-efficient planes.

New Acquisition Fitting in Well

On September 27, 2013, Gentex closed its $ 700-million purchase of Johnson Controls’ (NYSE: JCI) HomeLink business, whose systems let drivers remotely activate garage doors, lighting, home locks and security systems.

HomeLink is offered in all automotive brands and is compatible with 99% of garage-door opening systems. The acquisition is a natural fit for Gentex, which has been integrating HomeLink’s products into its automatic-dimming rearview mirrors for over a decade.

“HomeLink is a strategic and welcome addition to our portfolio of automotive products,” said Bauer when the acquisition was announced in July. “Our two businesses share similar cultures and traits, both being people-oriented, innovative, leading and technologically driven.”

Gentex reported its first quarter results on April 23, and the acquisition made a positive contribution.

The company reported sales of $ 335.7 million during the quarter, up 24.6% from a year ago and ahead of the consensus forecast of $ 324.2 million. Sales of automotive products rose 24%, to $ 326.3 million, while other net sales, including aircraft windows and fire-protection products, jumped 44%, to $ 9.4 million.

Gross margin widened to 39.1% from 34.7% a year ago, an improvement the company credited to the HomeLink acquisition, a better product mix and cost reductions. Earnings per share increased 46.9%, to $ 0.47, topping the $ 0.45 analysts were expecting.

Rear-Camera Ruling Could Give Sales a Lift

The stock recently jumped after the National Highway Traffic and Safety Administration (NHTSA) issued a rule requiring all vehicles under 10,000 pounds and built after April 30, 2018, to be equipped with a rear-view visibility system.

The move is in response to what the NHTSA calls “backover accidents,” which result in 210 deaths—31% of which are children under five—and 15,000 injuries each year in the U.S.

Gentex’s RCD system includes a rear-mounted camera that feeds video to a small display on the company’s auto-dimming rearview mirror when the vehicle is shifted into reverse. The display then disappears when the vehicle is shifted into any other gear. The ruling will likely accelerate the move toward RCDs, though most new car models already offer them, at least as an option.

The company has paid a dividend every year for more than a decade. The current annual rate of $ 0.56 a share ($ 0.14 quarterly) yields 1.95%.

Wall Street sees higher earnings ahead, with the average analyst estimate calling for profits of $ 1.86 a share this year, rising to $ 1.99 in 2015. Gentex trades at 15.4 times the 2014 estimate, which lines up well with the small-cap benchmark Russell 2000 index’s forward p/e ratio of 18.8.

With its founder in the driver’s seat and demand for its products rising, Gentex looks well-equipped for the road ahead.

In Roadrunner Stocks, Jim Fink uses the proven strategies of the all-time greats—including Peter Lynch and Warren Buffett—to pick undervalued small caps that are ready to soar. These “roadrunner stocks” create new millionaires faster than any other investment on the planet. Discover what they can do for you with a no-risk 90-day trial to the advisory. Click here to start yours now.

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