There are stocks that populate the stock market that range from providing the absolute basics, like Walmart to small everyday luxuries like Sodastream and Keurig Green Mountain all the way up to once in a decade purchases like the electric cars manufactured and sold by Tesla Motors. Gentherm (THRM) sits at the upper end of this necessity – luxury scale, and has generated enough interest from investors in the past year to register some serious increases in stock prices.
From this time last year, Gentherm has lifted its way from a range between $15-$20. Importantly, the company has consolidated these gains in 2014, performing strongly by rising from $26 to the most recent close of (insert most recent close here). Even more impressive is that this price appreciation of almost 100% has occurred in an otherwise choppy market affected by regular bouts of nerves, particularly in the tech sector.
So what about the company has made investors warm to the stock, and is the share price a long-term heat trend or a short-term flash in the pan? This report examines the argument for an investment in Gentherm Incorporated (THRM).
Understanding the Business
Gentherm operates in three discrete business segments, all, as their name suggests, in the business of heating and thermal technology. Climate Controlled Seats (CCS) is probably the most accessible and well known of the segments. CCS creates products that are designed to provide personally tailored climate control systems for passenger vehicles. The technology allows variable temperature setting within the same car by having the ability to change the heating controls for each individual seat. Complementary products also include chilled and heated cup holders for cars, as well as heated and chilled mattress products, primarily for the outdoor camping and lifestyle market.
The second segment is the Advanced Technology business line, whose primary function is the research and development of heating technologies. Their activities focus on the efficiency and effectiveness of thermoelectric devices and thereby improve their overall marketability and attractiveness. The sales and marketing function as well as the distribution also is undertaken within the advanced tech division.
The final division is the W.E.T. segment, which is an accessories focused manufacturer. Some of their major product lines include in-seat comfort, specialized cable products for cars and trucks as well as more basic seat heaters, steering wheel warmers as well as the technology to retrofit cars to adopt these changes.
The common element of the business divisions is the focus on research, development, product manufacture and sale of equipment that enhances the comfort and enjoyment associated with automotive activities, from regular commuter car use to business level travel and leisure activities that require off-road parts and products.
Metrics and Measures
This close focus on a fast-growing and clear market niche has clearly begun to pay rewards for Gentherm, as shown in the most recently reported fourth quarter and full year results.
The overall revenue figure for 2013 was a solid $662 million, which represented a 19% increase on the previous year. Areas of particular strength were in the Climate Control Seats segment which outperformed the business as a whole with growth of 21% representing a total of $277 million, which shows that divisions importance to the business as a whole as almost half of all revenue is derived from that segment.
The business also showed some pleasing returns from foreign currency translation effects from Europe, with over $141 million Euro earned from the continent, showing the multi-market appeal for Gentherm’s products.
The 2013 year was also the year in which the W.E.T. acquisition was recognized, which decreased earnings because of the large cash figure and earnings dilution resulting from that transaction.
As a whole, the gross margins for the business increased, which was one of the most encouraging signs for the business as a whole, with growth from margins of 25.6% to 26.4%. That margin increase, while at the same time as growing sales and revenue, implies that Gentherm has some level of pricing power over its products.
The Investment Case
One business driver dominates the investment case for Gentherm (THRM): the car industry. The revenue is almost entirely derived from the sale and manufacture of products that act as “bolt-on” or wholesale additions to cars, trucks and large vehicles.
The car industry itself is largely dependent on overall economic conditions, as consumers and businesses tend to delay large ticket items like car purchases when economic conditions are poor.
In this context, the growth in revenues and profits by Gentherm in the face of weak economic conditions in the major markets of the United States and Europe is doubly impressive. It shows that the company is able to position itself to grow even when strong economic headwinds are not in their favor. It also demonstrated the good sense of the W.E.T. acquisition as business assets are likely to be lower in price during tough times, but positions Gentherm as a whole as a business exposed to the wider car accessories industry rather than just car seats.
The forward outlook for the company as far as consumer trends is concerned is also strong, as the populations of North America and Europe age and many more retirees are drawn to the outdoor all-wheel driving, camping, fishing and hiking pursuits, which all require cars and trucks. Importantly, this market segment is willing to pay more for premium products to improve comfort while pursuing these activities.
The favorable trends for Gentherm (THRM) are a sensible acquisition, exposure to a growing market segment and a strong research and retail proposition in the “higher end” car accessories market. The prospects for future growth of profits and the share price are dependent on continued focus on the market segment which has served them well and cross-selling to that market, while also growing the business in overseas markets like Europe and possibly South America and Australia. Genthem therefore is a well-positioned and profitable business with good prospects for future growth.