This Auto Supplier Stock Is a Cheap Way to Play the EV Boom
The road to Dracula’s castle winds through Transylvania’s rolling mountains. The stylish way to go is in the Carpathian Edition of the Land Rover Defender, a $112,000 sport utility vehicle with a high-tech ride and seating, including thermoelectric devices to keep you toasty or cool.
The seating technology comes from Gentherm (ticker: THRM), a small-cap auto supplier based in Northville, Mich. The company has 60% of the global market for heated and air-conditioned seats, towering over its next competitor at 10%. Climate-control products account for 37% of Gentherm’s total sales, estimated at $1 billion in 2021. The rest of the business consists of other seating products and automotive components, and a small medical-device division.
Auto production is ailing due to a global semiconductor shortage. But the supply chain should ease up in the second half of 2022, giving Gentherm a sales lift. Analysts expect the company to report $185 million in earnings before interest, taxes, deprecation, and amortization, or Ebitda, in 2022, up 22% from this year.
The stock, at $84, has gained 29% this year, pushing its multiple well above the industry’s and its own five-year average. It now trades at 24 times expected earnings of $3.51 a share, a premium to most other auto suppliers.
Why the steep multiple? Because climate-controlled seating is expanding to the mass market—growing from 4% of U.S. new vehicles in 2013 to 18% in 2020. More important, Gentherm has a shot at the fastest-growing part of the car market: electric vehicles.
The company’s new ClimateSense product aims to create a “microclimate” around a car’s occupants. The technology uses thermoelectric devices, sensors, and software embedded in seats, footwells, armrests, and the steering wheel to fine-tune a comfort zone.
It sounds a bit excessive, but it could take a load off an EV’s heating, ventilation, and air-conditioning, or HVAC, system—the second largest battery-power consumer in an EV after the motor. And lower energy demands on the HVAC could conserve power for the battery pack, improving an EV’s performance and driving range.
According to Gentherm’s tests on a Chevy Bolt EV, ClimateSense produced energy savings of 50% to 69% in cold-weather conditions and 34% savings in warm weather over a conventional HVAC. And it should improve driving range in both conditions, including 30% gains in cold weather, the company says.
“We think that it can transform the company over the course of the next decade,” said Gentherm CEO Phil Eyler at an investor conference in early November.
Gentherm is also developing thermal management systems for EV batteries. Using a “thin foil” conducting material, the technology can help optimize battery temperature and performance. The product eliminates some wiring, reducing manufacturing costs, and Gentherm aims to pack it with sensors and other circuitry, with partner Datang NXP Semiconductors. “The idea is to get computing power closer to the battery,” says Baird analyst Luke Junk, who rates the stock Outperform. “That has a swath of positive implications.”
Gentherm hasn’t revealed much about its ClimateSense sales. The product will be in a “low volume” 2024 model-year EV, the company says. That makes it unlikely to be a major player like Tesla (TSLA). And since it adds costs to a car, it could take years to reach mass-market EVs. Still, it should trickle down eventually, says Glenn Chin, an analyst at Seaport Research Partners, who rates the stock a Buy. “It has the potential to be a game changer for Gentherm as the industry transitions to EVs,” he says.
The stock faces several overhangs. One is that Covid-related disruptions could linger well into 2022. General Motors (GM), for example, won’t be offering heated and cooled seating in most 2022 models due to chip shortages, although the company says dealers can retrofit the features.
More specific to Gentherm, the company could lose sales to one of its biggest customers, Lear (LEA), which assembles seating for auto makers. Lear plans to take seating components in-house, recently announcing a deal to buy the seating business of Kongsberg Automotive (KOA.Norway), a European manufacturer.
Gentherm says that 70% of its sales to Lear originate with auto makers. Those contracts aren’t vulnerable in the near term, partly because they last for years, through a full model cycle, says Chin. He figures that Gentherm could still lose 5% of its automotive revenue if Lear cuts back, but even that might be overstated, since Kongsberg doesn’t manufacture products that actively cool and heat seats. “Gentherm is the only game in town for heated-and-cooled seating,” says Chin.
Gentherm aims to hit $2.5 billion in revenue by 2025, a target it established in 2018. Despite the industry slowdown, the company hasn’t cut that goal, a sign that it still views it as achievable.
The financials look solid for now. Ebitda margins are expected to rise from 15.8% in 2022 to 17.4% in 2023, according to consensus estimates. Chin sees the stock gaining modestly to $92, at a multiple of 11 times 2023 Ebitda. Baird’s Junk sees it hitting $94 as the industry recovers, but he likes the longer-term outlook, picking the stock as a winner in the EV market.
“It’s a way to play the EV market without paying the outrageous multiples” of stocks like Lucid Group (LCID) or Rivian Automotive (RIVN), says Adam Peck, founder of Riverwater Partners, a $750-million advisory firm that owns Gentherm stock for clients. Land Rover plans to launch its first EV in 2024. Gentherm could make its Carpathian-climbing SUVs a bit more climate-friendly.