One of Warren Buffett's favorite characteristics in a company is what he calls a moat. It's a strong competitive position that makes it difficult for rivals to take business. The technology industry isn't known for moats. In fact, it's famous for the opposite -- constant disruption.
But sometimes a tech company can carve out a niche for itself, defend it with patents, and enjoy a long steady life producing profits for shareholders. That's a good description of Gentex (GNTX -1.45%). The stock won't get your heart racing. But a dominant market position and commitment to shareholder returns might be exactly what your portfolio needs.
Image source: Getty Images.
It's the ruler of a shrinking kingdom
Gentex is known best as a maker of auto-dimming rearview mirrors in cars. If you're over 40 years old, you probably remember manually flipping the mirror at night to keep from being blinded by the cars behind you. The company solved that problem in the 1980s. It's branched out into exterior mirrors and much more.
It now produces dimming windows for aircraft, backup cameras for cars, and integrated home communications for the car, such as garage door openers, home lighting, and security systems.
Auto production drives sales. And volumes are down. For years, the number of passenger vehicles produced has been declining. Despite that, management is predicting revenue to rebound in a big way next year. More on that later.
But it's still the king
Even with auto production declining, Gentex is unrivaled in its core market of auto-dimming mirrors. The dominant position has lasted for decades. That strength has proved to be a great foundation for finding new ways to garner a higher percentage of the cost to build each vehicle.
Data source: Gentex. Chart by author.
In addition to its 2013 acquisition of HomeLink -- the one that brought integrated controls for garage doors, lighting, security, and more -- it has also purchased technology that integrates toll payments, as well as tech for creating panoramic rearview displays. Gentex has even strayed outside the box by making bets on devices to help the visually impaired, an innovative lighting solution for medical applications, and a material that detects chemicals, explosives, and drugs. It shows leadership probing for potential new growth areas to leverage its patents.
And headwinds aren't expected to last forever
One or all of those bets might pay off. But its fortunes are tied to auto manufacturing for now. That's how 97% of revenue is still derived. It's been a tough environment lately. Rising costs, scarce labor, and supply chain constraints have put a dent in profit margins. But even before the pandemic, margins were shrinking.
GNTX Gross Profit Margin data by YCharts
The dark clouds could be lifting soon. Management is actively negotiating new pricing with its customers to account for inflation. And it expressed encouragement on the most recent earnings call about recent trends in the auto industry. To that end, Gentex expects revenue to be 15% to 20% higher in 2023 compared to this year. Electric vehicles could help achieve that lofty goal. Not only does it supply legacy brands such as Ford and General Motors, but it's also shipping product to Tesla, Lucid Motors, Rivian, and Stellantis.
Meanwhile, Gentex pays a respectable 1.6% dividend, has no debt, and spent the past decade repurchasing close to one-fifths of the shares outstanding. That combination of shareholder returns, market position, and continuous progress in gaining a higher percentage of the cost to build a vehicle makes me think Gentex is a great company for investors who want to stay invested but fear market volatility.
