Spruce Point Capital Releases, A Dimming and Grim Outlook, a Strong Sell Research Opinion on Gentex Corporation (Nasdaq: GNTX)

NEW YORK, July 13, 2017 /PRNewswire/ -- Spruce Point conducted an extensive fundamental and forensic accounting review, encompassing several Freedom of Information Requests (FOIAs), a product tear-down (reverse engineering) test, and conversations with former employees. We believe that Gentex Corp. (Nasdaq: GNTX) faces 40%-80% downside risk as a result of potential financial misstatement and a litany of fundamental challenges.

Our forensic review raised multiple red flags pertaining to Gentex's financial statements:

    --  We've uncovered multiple instances where the Company has made
        contradictory statements across government entities, public financial
        statements and internal communications.  Additionally, through FOIAs and
        forensic accounting analysis we have strong conviction that aggressive
        Capex and Inventory inflation may be used to inflate margins to
        forestall underlying weakness.  These red flags are cause for heightened
        concern given conversations that we've held with individuals previously
        involved with the Company and the extremely poor governance, financial
        controls and audit oversight currently in place.   Once interested third
        parties (SEC, Michigan Environmental Agency, Gentex creditors, etc.)
        evaluate our claims there is potential for Gentex to be in violation of
        its credit agreement.

In addition to concerns about Gentex's financials, we believe that investors will also have to look beyond myriad fundamental challenges on the horizon:

    --  Contribution and profitability from key modules are in decline: Our
        field research indicates that SmartBeam (10% of sales) is already in
        decline as cost of traditional driver assist packages continue to come
        down in price and OEMs look to avoid redundancies. HomeLink now faces
        competition for the first time from a comparable Magna product and
        various phone apps with additional functionality.
    --  We are likely in the early innings of a meaningful SAAR decline and
        de-contenting cycle: The past cycle of surging auto sales, high levels
        of affordability and the gradual digitalization of the auto user
        experience (UX) presented the ideal backdrop for Gentex. We believe the
        current dynamics of the used car market have set the stage for a
        dramatic reversal in auto sales and affordability. We believe that
        reduced affordability will lead to de-contenting, magnifying the
        challenge of the downturn for Gentex.
    --  The Full Display Mirror (FDM) is a problem, not the answer: Gentex's
        moat historically has been the auto-dimming feature of its mirrors. The
        fact that the FDM functions primarily as a display, rather than a
        mirror, makes the auto dimming feature almost irrelevant. This exposes
        Gentex to a much wider range of competitors, including display suppliers
        attempting to make mirrors and traditional mirror companies that have
        strategically partnered with display companies. We believe that Ficosa
        (Panasonic) is offering their own version of the FDM at a 50% haircut to
        the Gentex FDM price. Gentex's inability to rely on an auto dimming
        premium and reliance on Kyocera as a display supplier will limit margin
        and their ability to compete on price.
    --  The long-term viability of the mirror is difficult to envision: The
        convergence of the connected car and assisted driving are rapidly
        reshaping the technology UX experience of the automobile, particularly
        vehicle navigation. We believe that the future of vehicle navigation is
        cameras, sensors and displays, not mirrors. Over the past several years'
        multiple world class technology companies (e.g., Samsung, Panasonic,
        Intel, Google) have entered the space via strategic investment and
        acquisition of existing automobile navigation suppliers. All of these
        players are focusing their efforts on the UX and to date almost all of
        them are focused on Heads Up Display (HUD) or the center console. Gentex
        appears to be on an island, having not forged any strategic partnerships
        of meaning to date and linking their future to the likely ill-timed
        near-term solution of the FDM.

Wall Street analysts see just 12% upside in Gentex, a terrible risk/reward:

    --  Analysts assume that its margins are industry leading and fairly
        presented, its competitive position is defensible, management is
        trustworthy and honest, and its valuation should reflect a premium to
        auto supply peers. Analysts expect Gentex to achieve nearly 8% revenue
        and 10% earnings growth this year, despite creeping signs of peak auto
        sales.
    --  We believe this market consensus view is entirely flawed, and does not
        incorporate our incontrovertible evidence of irregularities, and product
        teardown results illustrating limited proprietary content. We estimate
        Gentex's gross margins are likely closer to 20-30% vs 40% reported, and
        its revenue growth expectations will disappoint. On a discounted 9x -12x
        multiple to account for the pending auto cycle correction and extreme
        potential for financial malfeasance, we see approximately $4.00 - $12.00
        per share, or 40% - 80% near-term downside risk. Longer-term industry
        displacement of mirrors could render Gentex worthless.
    --  If you don't believe us, we suggest reading Bofa/ML's June report which
        places an $11 price target on Gentex: "In our view, the solid growth
        that Gentex once enjoyed is likely to be challenged by increasing
        competition and potential substitute products. At the very least, the
        existence of a potential replacement product will likely drive
        meaningful pricing pressure for Gentex."

The research report can be found at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.

Spruce Point Capital has a short position in Gentex Corporation and stands to benefit if its share price falls.

About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic research activist investment manager that focuses on short-selling, value and special situation investment opportunities.

Contact
Sean Donohue
Spruce Point Capital Management
sean.donohue@sprucepointcap.com
212-519-9813

Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.

SOURCE Spruce Point Capital Management, LLC

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SOURCE Spruce Point Capital Management, LLC