Before I begin, it's interesting to note that the only executive receiving special bonuses is the Chief Accounting Officer.
Gentex is a manufacturer and supplier of auto-dimming rear-view mirrors for cars. They also make fire alarms for mobile homes and the dim-able windows in the Boeing 787 passenger aircraft. Automobile mirrors make up 98% of its business.
I came across the stock when looking at high margin businesses. Gentex has been reporting net margins of around 30%-40% for many years now. I was surprised and could not figure out what made their margin so fat, especially being a business that competes in such a highly competitive, commoditized, and cutthroat business like automobile parts supplying.
My main concern is this - Gentex’s inventory growth as compared to net sales and receivables has outpaced it by three times So what does this mean. This means that Gentex is overcapitalizing so they can overstate earnings.
What would be an example that Gentex does this? According to their 2017 annual report, page 12, they reported construction of 250,000 sq. ft. manufacturing facility near their headquarters in Zeeland, Michigan. However, a local company that participated in constructing the facility, Brewers City Dock, advertises the building was 350,000 square feet.. This is a 40% overstatement.
Another example would be Gentex's investment portfolio. Again, looking at their 10K, page 42,, they show more evidence they might be fudging numbers to overcapitalize. For some reason, CDs are priced at level 1, while government securities, mutual funds, and corporate bonds are actively traded and should be marked to market, but they are categorized in level 2!
As a matter of fact, in essentially every metric of capital expenditure, including PPE/employee, PPE/sq foot of manufacturing space, and PPE/revenue, Gentex beats its competitors by a factor of at least 1.5 to 2 times.
| Metric | Magna | SMI | Gentex |
|---|---|---|---|
| PPE/sq.ft | $0.16 | -- | $0.60 |
| PPE/Rev | $0.35 | $0.20 | $0.61 |
| PPE/employee | $0.09 | $0.04 | $.20 |
It's also worth noting that their auditing fees are lower than any other company.
Obviously, if they are overstating earnings, it's no surprise that their number one employee complaint is low salaries and the fact that since 2010, their dividend payout ratio has dropped nearly 80%. If this was simply conservative cash management, we'd see it in the filings, but their cash on hand hasn't grown by a comparable rate.
Couple these worrying issues with the general instability and headwinds of the current auto market, and I am considering going short the company. I would like your thoughts though? Am i stupid and missing something obvious here? Or are my concerns legitimate...
Submitted October 10, 2018 at 06:30PM by missedthecue https://ift.tt/2PtiPdE
