Rating Update: Stock Rating C-Neutral (7/19/19)-Gentherm Inc (THRM).

out_logo_500#22201.jpg

BUSINESS

Gentherm Incorporated designs, develops, and manufactures thermal management technologies in North America, Europe, and Asia. The company operates through two segments, Automotive and Industrial. The Automotive segment offers automotive seat comfort systems, including seat heaters, variable temperature climate control seats that are designed to provide individualized thermal comfort to automobile passengers; and integrated electronic components, such as blowers and electronic control units. This segment also provides specialized automotive cable system products, including ready-made wire harnesses and related wiring products; automotive steering wheel heaters, heated door and armrests, heated and cooled cup holders, and thermal storage bins; and non-automotive products comprising heated and cooled mattress and furniture.
out_plist#22201.jpg

INVESTMENT RATING

out_map1#22201.jpg

With future capital returns forecasted to exceed the cost of capital, THRM is expected to continue to be a major Value Builder.

Gentherm has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Gentherm has a slightly positive Appreciation Score of 66 but a slightly negative Power Rating of 30, with the Neutral Value Trend Rating the result.

Gentherm’s stock is selling well below targeted value. The current stock price of $39.04 compares to targeted value 12 months forward of $62.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
out_pt#22201.jpg

Gentherm has a Power Rating of 30. (THRM’s slightly negative Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 30% of companies in the universe.)
Factors contributing to this slightly negative Power Rating include: is in a slightly weakened position current; and recent price action has been slightly unfavorable. An offsetting factor is earnings estimate behavior for THRM has been slightly favorable recently.

INVESTMENT PROFILE

Gentherm’s financial strength is high. Financial strength rating is 88.
out_pfit1#22201.jpg

Relative to the S&P 500 Composite, Gentherm Inc has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that THRM is normal risk. Relative weaknesses include: high stock price volatility, low historical growth, and high earnings variability. Gentherm’s valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. THRM has unusually low market capitalization.

CURRENT SIGNALS

Gentherm’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; and rising tax keep rate.

Gentherm’s current technical position is very weak. The stock price is in a 6.8 month down move. The stock has declined 20.4% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

The stock is currently rated C.
Gentherm Inc (NASDAQ: THRM) stock closed at $0.05 on 7/19/19 after a major decline of -15.0%. However, this decline was accompanied by below average trading volume at 79% of normal. The stock has declined -0.5% during the last week and has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, Gentherm experienced a very significant reduction in cash of -$63.6 million (-62%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$137.9 million. Non-operating uses consumed -$24.5 million (-18% of EBITDA). Cash taxes consumed -$21.4 million (-16% of EBITDA). Re-investment in the business amounted to -$29.7 million (-22% of EBITDA). On a net basis, debt investors removed -$9.7 million (-7% of EBITDA) while equity investors received -$116.1 million (-84% of EBITDA).
out_cflow.1#22201.jpg

Gentherm’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Gentherm Inc Peer Group. In most years, Gentherm was in the second quartile and top quartile. Currently, Gentherm is lower quartile at -18% of EBITDA (-$24.5 million).

Gentherm’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Gentherm Inc Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Gentherm was in the second quartile and top quartile. Currently, Gentherm is slightly above median at -16% of EBITDA (-$21.4 million).

Gentherm’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Gentherm Inc Peer Group. In most years, Gentherm was in the second quartile and third quartile. Currently, Gentherm is above median at -22% of EBITDA (-$29.7 million).

Gentherm’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Gentherm Inc Peer Group. In most years, Gentherm was in the top quartile and second quartile. Currently, Gentherm is slightly above median at -7% of EBITDA (-$9.7 million).

Gentherm’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Gentherm Inc Peer Group. In most years, Gentherm was in the top quartile and third quartile. Currently, Gentherm is lower quartile at -84% of EBITDA (-$116.1 million).

Gentherm’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Gentherm Inc Peer Group. (Since 2015 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Gentherm was in the top quartile and lower quartile. Currently, Gentherm is substantially below median at -46% of EBITDA (-$63.6 million).
out_cflow.2#22201.jpg

Gentherm’s Cash, %Revenue has suffered a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Gentherm Inc Peer Group. (Since 2016 Cash, %Revenue has accelerated sharply.) In most years, Gentherm was in the top quartile and second quartile. Currently, Gentherm is below median at +4%.

PROFITABILITY

Gentherm’s return on equity has improved significantly since 2009.
This significant improvement was due to very strong positive trend in pretax operating return offset by strong negative trend in non-operating factors.
The productivity of Gentherm’s assets rose over the full period 2009-2019: asset turnover has exhibited a volatile overall uptrend.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend even as it experienced a very sharp decline after the 2015 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
out_dpgrfs3#22201.jpg

Gentherm’s return on equity is lower quartile (7.8%) for the four quarters ended March, 2019.
out_dpgrfs3.2#22201.jpg
Operating performance (pretax return on assets) is above median (7.5%) reflecting asset turnover that is upper quartile (1.36X) and lower quartile pretax margin (5.6%).
Tax “keep” rate (income tax management) is lower quartile (65.0%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is at the lower quartile (1.59X).

GROWTH RATES

There are no significant differences between Gentherm’s longer term growth and growth in recent years.
Gentherm’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 21.3% per year.

Total asset growth has been 19.8% per year.

Annual E.P.S. growth has been 39.7% per year.

Equity growth has been 23.3% per year.

Gentherm’s consensus growth rate forecast (average of Wall Street analysts) is 20.0% — substantially below the average of the historical growth measures.
out_growthgrf#22201.jpg

Relative to the Gentherm Inc Peer Group, Gentherm’s historical growth measures are consistently top quartile. Revenue growth (21.3%) has been upper quartile. Total asset growth (19.8%) has been upper quartile. E.P.S. growth (39.7%) has been upper quartile. Equity growth (23.3%) has been upper quartile.

Consistent with this pattern, consensus growth forecast (20.0%) is also upper quartile.
out_growthgrf.2#22201.jpg

PRICE HISTORY

Over the full time period, Gentherm’s stock price performance has been volatile and exceptional. Between September, 2008 and July, 2019, Gentherm’s stock price rose +493%; relative to the market, this was a +132% gain. Significant price moves during the period: 1) August, 2013 – August, 2014: +192%; and 2) June, 2010 – June, 2011: +136%.
out_price#22201.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of 6.4% is slightly below median relative to the S&P 500 Composite.
In addition to being slightly below median relative to S&P 500 Composite, current annual total return performance through June, 2019 of 6.4% is slightly below median relative to Gentherm Inc Peer Group.

Current 5-year total return performance of -1.2% is lower quartile relative to the S&P 500 Composite.
Through June, 2019, with lower quartile current 5-year total return of -1.2% relative to S&P 500 Composite, Gentherm’s total return performance is lower quartile relative to Gentherm Inc Peer Group.
out_quartret#22201.jpg

VALUATION BENCHMARKS

Relative to S&P 500 Composite, THRM’s overall valuation is normal. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/assets is above median. Ratio of enterprise value/earnings before interest and taxes is below median. Price/equity ratio is below median. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
out_tradv#22201.jpg

Gentherm has a very large value gap compared to the median. For THRM to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.34X to 1.04X. If THRM’s ratio of enterprise value/revenue were to fall to 1.04X, its stock price would be lower by $-9 to $30.
For THRM to achieve upper quartile valuation relative to the Gentherm Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.34X to 1.43X. If THRM’s ratio of enterprise value/revenue were to rise to 1.43X, its stock price would increase by $3 from the current level of $39.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, THRM is expected to continue to be a major Value Builder.
Gentherm’s current Price Target of $64 represents a +63% change from the current price of $39.04.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
With this moderately high Appreciation Score of 66, the moderately low Power Rating of 30 results in an Value Trend Rating of C.
out_vc#22201.jpg

Gentherm’s current Price Target is $64 (+15% from the 2018 Target of $55 and +63% from the 07/19/19 price of $39.04). This slight rise in the Target is the result of a +2% increase in the equity base and a +13% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted decline in growth has a very large negative impact.
out_wc.1#22201.jpg
out_wc.2#22201.jpg

PTR’s return on equity forecast is 21.4% — above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is below the 2011 peak of 26%.

PTR’s growth forecast is 6.0% — below our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2013 peak of 55%.

PTR’s cost of equity forecast is 8.7% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic increase between 2010 and 2018. The current forecast is below the 2014 peak of 13.0%.
out_vc.2#22201.jpg
At Gentherm’s current price of $39.04, investors are placing a positive value of $11 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 14.0% per year, and a return on equity of 15.7% versus a cost of equity of 9.0%.
PTR’s 2020 Price Target of $64 is based on these forecasts and reflects an estimated value of existing assets of $40 and a value of future investments of $23.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.