This Auto Supplier Stock Is a Cheap Way to Play the EV Boom

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The road to Dracula’s castle runs through the rolling mountains of Transylvania. The stylish way to go is in the Carpathian version of the Land Rover Defender, an $112,000 sport utility vehicle with a high-tech ride and seating, including thermoelectric devices to keep you toasty or cool.

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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, which is 10% more than its next competitor. Climate-control products accounted for 37% of Gentherm’s total sales, which were estimated at $1 billion in 2021. The remainder of the business includes other seating products and automotive components, and a smaller medical-device division.

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Auto production is deteriorating due to global semiconductor shortages. But the supply chain should ease in the second half of 2022, giving Gentherm a boost in sales. Analysts expect the company to report $185 million in earnings before interest, taxes, depreciation, and amortization, or EBITDA, in 2022, up 22% from the year.

The $84 stock has gained 29% this year, which is several times above the industry and its own five-year average. It is now trading at 24 times expected earnings of $3.51 per share, which is a premium to most other auto suppliers.

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Why vertical? That’s because climate-controlled seating is expanding into the mass market – growing from 4% of US new vehicles in 2013 to 18% in 2020. More importantly, 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 the people in the car. The technology uses thermoelectric devices, sensors and software embedded in the seats, footwells, armrests and steering wheel to fine-tune a comfort zone.

That sounds like a bit much, but it can load an EV’s heating, ventilation, and air conditioning, or HVAC, system—the second largest battery-power consumer in an EV after the motor. And the lower energy demand on HVAC can save power for the battery pack, improving the performance and driving range of an EV.

According to Gentherm’s tests on the Chevy Bolt EV, ClimateSense delivered energy savings of 50% to 69% in cold weather and 34% in hot weather compared to traditional HVAC. And it should improve driving range in both conditions, including a 30% gain in cold weather, the company says.

“We think this could transform the company over the course of the next decade,” Gentherm CEO Phil Eyler said at an investor conference in early November.

Gentherm is also developing a thermal management system for EV batteries. By using “thin foil” conducting materials, the technology could help optimize battery temperature and performance. The product eliminates few wiring, reduces manufacturing costs, and Gentherm aims to pack it with sensors and other circuitry to partner Datang NXP Semiconductors. “The idea is to bring computing power closer to the battery,” says Baird analyst luke junk, which rates the stock outperform. “It has a positive effect.”

Gentherm hasn’t revealed much about its ClimateSense sales. The company says the product will be in “low volume” 2024 model-year EVs. This is unlikely to lead to a major player like Tesla (TSLA). And since it adds cost to a car, it can take years to reach mass EVs. Still, it must eventually fall down, say Glen Chino, an analyst at Seaport Research Partners, who rates the stock as buy. “This has the potential to be a game changer for Gentherm as the industry transitions to EVs,” he says.

The stock withstands several overhangs. One is that Covid-related disruptions could run well into 2022. General Motors (GM), for example, will not offer heated and cooled seating in most 2022 models due to chip shortages, although the company says dealers may roll back the features.

More specific to Gentherm, the company could lose sales to one of its biggest customers, Lear (LEA), which makes seating for auto makers. Lear plans to take the seating components in-house, recently announcing a deal to buy the seating business of European manufacturer Kongsberg Automotive (KOA.Norway).

Gentherm says that Lear gets 70% of its sales from auto manufacturers. Those contracts aren’t vulnerable in the near term, says Chin, partly because they last for years, through a full model cycle. He says that if Lear cuts back, Gentherm could still lose 5% of its automotive revenue, but it could be even more, because Kongsberg doesn’t manufacture products that actively cool and heat seats. Huh. “Gentatherm is the only sport of hot and cold seating in town,” says Chin.

Gentherm aims to achieve $2.5 billion in revenue by 2025, a goal established in 2018. Despite the slowdown in the industry, the company hasn’t cut that target, a sign that it still sees it as achievable.

Financials look solid for now. According to consensus estimates, EBITDA margin is expected to increase from 15.8% in 2022 to 17.4% in 2023. Chin sees the stock rise marginally to $92, at a multiple of 11 times EBITDA by 2023. Baird’s junk sees it hitting $94 as the industry recovers, but he prefers a longer-term outlook, choosing the stock as the winner in the EV market.

It’s a way to play in the EV market without paying “outrageous multiples” of stocks like Lucid Group (LCID) or Rivian Automotive (RIVN), says Adam Peck, founder of Riverwater Partners, a $750 million advisory firm, Joe Gentherm. owns the stock. Customer. Land Rover is planning to launch its first EV in 2024. Gentherm could make its Carpathian-climbing SUV a little more climate-friendly.

write to Daren Fonda at [email protected]

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