October 17, 2018 - 12:10pm EST by
2018 2019
Price: 40.00 EPS 2.29 2.91
Shares Out. (in M): 37 P/E 17.5 13.8
Market Cap (in $M): 1,450 P/FCF 21.8 15.4
Net Debt (in $M): 48 EBIT 95 130
TEV (in $M): 1,505 TEV/EBIT 15.8 11.6

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  • Why is chatham so angry?
  • I've done zero work but am short


Why is this guy recommending an auto name at this point in the cycle? This thing is trading at a 15x ’19 P/E vs the entire auto supplier group at close to 8x – why would I ever want to own this? Wait this is cupmachine’s first write-up?----forget it. This is what would be going through my head if I was a long time VIC member. However, if you are still reading, I believe Gentherm has the opportunity to double earnings in 3 years or a 26% EPS CAGR in a flat production environment. Perhaps that caught your attention!


I have been working in the industry for almost 15 years for a well-known institutional shop – so this is not my first rodeo. The reason it has taken me so long to finally submit an idea is frankly unknown to me but is a great exercise to memorialize my ideas and be subject to the slightly anonymous criticism of my peers.

Gentherm Brief History

Gentherm used to be known as Amerigon (name changed in 2012) and focuses on technologies exploiting thermodynamics. The company was founded in 1991 with the goal of finding new ways to use advanced heating applications to address unmet needs within auto as well as other industries. By 1996, the company introduced a heated and cooled seat for automotive which was a first for the industry.  The business began to grow rapidly as the adoption curve ramped and consumer awareness grew. In 2011 the company made a game-changing transaction buying W.E.T. Automotive Systems. This provided an established manufacturing footprint where Gentherm previously used contract manufacturers and further diversified the customer base making Gentherm the dominant player with the highest market share. In 2014 the company purchased a remote power business and in 2016 acquired Cincinnati Sub-Zero, a provider of temperature management systems to medical and industrial. Both these businesses were combined into a new industrial segment to further extend Gentherm’s technologies into adjacent markets. Most recently, the company acquired Etratech, to advance Gentherm’s expertise in electronics to address 48volt architecture. Today the company has many products for auto and industrial applications and remains the leader in heated/cooled seats in automotive.



  1. New CEO with a strong track record (Phil Eyler): Phil had a 20 year career at Harman where he was instrumental in doubling the automotive audio business. His success led him to managing Harman’s connected car division where he helped develop technology products for the future of auto. Through my many conversations within the auto industry, Phil comes highly regarded. The CEO recently laid out an ambitious plan to divest non-core businesses, bring a renewed focus on auto, and return margins to the company’s previous peak. Since his hire, the stock has moved up 15%+ and has been one of the better performing auto names YTD.


  2. Battery Thermal Management could be a game changer for the company: This is a business that did $10 million in revenue last year and is expected to hit a $100 million run rate exiting 2019 with an aspirational goal of $500 million in 2025. This technology was developed organically at the company and is still new to the automotive industry. The product they have today addresses temperature control for batteries in Hybrid electric vehicles. Essentially it is a plate in the battery that cools when the battery overheats and warms when it is too cold – keeping a consistent temperature which allows the battery to run at its most efficient level. Gentherm charges around $50-$150/unit and as the business ramps the margins will converge towards corporate wide auto margins. They currently have two customers (Mercedes EQ & Jeep Wrangler) and 2 Asian OEMs in pre-development. In addition, Gentherm is developing products to address all electric vehicles as well as other battery related products.


  3. Further penetration opportunity for heating applications within auto: THRM is the leader for seat heating products. In the US penetration rates for heating/cooling products are still low: Heated seats: 43%, Cooled seats: 16%, Heated steering wheels: 23% and globally I expect it to be even lower providing a long runway for growth. Below I have listed three sub-segments within auto which continue to address the penetration story.

    1. Climate Controlled Seats (CCS): This segment includes two main seating products – Heat/Vent cooled and Heat/Active cooled. Heat vent uses the AC to vent cool air through a perforated seat and Heat/Active cool uses an electronic device that radiates cool temperature through the seat.

    2. Seat Heaters: Are just seat heaters and do not have any cooling component

    3. Steering Wheel Heaters: I have heard that once you have them you can’t live without them – this product keeps the steering wheel warm.As I mentioned before,



  4. CCS segment to return to growth: Over the last two years there has been a mix shift change in the CCS segment where OEMs were moving away from Heat Active cooled (higher priced product: $70-$80/seat) to Heat/Vent (lower priced product: $40-60/seat), which has caused revenue in that segment to decline. Two main reasons for the change was price and the energy consumption of heat/active cooled was high vs heat/vent – so the value proposition just wasn’t there. Ironically however, there have been recent studies done by OEMs which found the heat/active cooled product reduces the need to use the AC and thus provides net energy savings. In fact GM recently applied to the EPA for the vehicles sold using active cooled devices and received a large tax credit back (I have heard close to $50 million) and allegedly another un-named OEM received a much larger back credit. This has changed the perception and now OEMs are moving back in favor of heat/active cooled. I expect this segment to no longer be a headwind and in 2019 to begin to grow again. This also leads into my next thesis point in terms of the trend towards lowering the reliance on the HVAC system.


  5. Future solutions will help scale back the HVAC system longer term: The HVAC system is one of the biggest energy consumption products in the automobile. Any opportunity to reduce the size/scale of the system will create energy savings to help OEMs meet future CAFE standards. Gentherm is currently working with OEMs to develop a new microclimate system using the seats Even though this application is further down the line (2022 at the earliest), it has the potential to enhance the consumer experience, save space, save energy and massively increase the penetration rates for THRM products.


  6. Picking up some low hanging fruit – divesting most of the industrial businesses & cutting non-auto R&D: Since 2014, previous CEO Dan Coker saw an opportunity to extend Gentherm’s technology into adjacent markets. The company spent over $100 million buying two businesses that addressed industries such as energy, health care, & manufacturing/R&D. The ramp in this segment was hugely dilutive to margins and thus returns on capital.  The new CEO has decided to sell the energy business (GPT) and the industrial test business within CSZ but will keep the health care business (also within CSZ). They are keeping health care because there are synergies with auto since applications in both are for thermal management/comfort systems for humans. In my model, I estimate that they will sell $80 million in revenue at the end of 4Q19 (likely will happen sooner) and will receive about $80 million in proceeds (could be high but felt a strategic would pay 1x revenue). In addition to getting rid of these non-core businesses, the management team will cut out excess R&D not related to auto/health care – for example they were developing heating/cooling seats for aerospace and other industries where there likely will not be real demand in the near term. By divesting money losing businesses & reducing R&D, I expect ROIC to expand which should be a driver for stock outperformance. I believe Gentherm’s stock declined from 2015 to 2017 mostly due to the declining ROIC of the business.

  7. Strong balance sheet and willingness of management to return capital to shareholders: Currently the company is 0.5x levered and will generate FCF of ~$400 million from 2019-2021 (25% of the EV). I expect the company to become more aggressive with their share repurchase program. They have $275 million available on their buyback program. In my model, I assume they finish the entire buyback program over the next three years at an average cost of $62/share which is halfway between the stock price and my target. In their analyst day presentation, they expect to deliver about $480 million in FCF from 2019-2021 which is $80 million higher than my estimate and establish a target leverage of 1-1.5x which if true frees up  an additional $200-$300 million of capital for further share repurchases, special dividends or strategic bolt on acquisitions. I summarize in the table below:









I expect organic revenue growth to accelerate to high single digits from 3-4% today and EPS to almost double to $4.61 in 2021 or a 26% CAGR. I assume global auto production is flat through 2021, so if you believe that is too aggressive then you can discount my organic growth by however much you believe production will decline. Over the last 5 years THRM has traded at a 19.5x P/E FY1 & 10x EBITDA FY1. Given the recent route in the auto space, I apply a 17x EPS multiple on $4.61 to get an $80 stock price (rounding up). If Gentherm decides to be more aggressive with their buyback there could be upside to this target. My income model summarized below:





  1. Stock has outperformed auto sector YTD. Market needs to see execution on the analyst day plan for further stock appreciation.

  2. Customer Concentration: GM: 18%, Ford: 12%, Hyundai: 10%, Fiat/Chrysler: 10%, VW: 10%

  3. Indirect Customer Concentration: Lear: 20%, Adient: 18%, Bosch: 8%

  4. Geographic Concentration: US: 46%, China: 9%, Germany: 7%, South Korea: 7%, Japan: 6%

  5. Lear’s CEO is on the board of Tempronics and Lear has an ownership stake in the company. Tempronics is a start-up competitor to THRM and Lear is incentivized to try and vertically integrate their seating products away from THRM. However, heating products are decided by the OEM vs the seat supplier.

  6. Multiples in the auto supplier space could deteriorate further. THRM’s lowest P/E multiple over the last 5 years was 12.5x – if I apply that to FY18 EPS of $2.29, I get a $30 stock (25% decline from today’s stock price)

  7. THRM could decide to be much less aggressive on a buyback. If they don’t buy any shares then my EPS in 2021 goes to $4/share = $70 stock on a 17.5x multiple




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.



1) New CEO


2) Growth in Battery Thermal Management


3) Further penetration for heating/cooling applications in the vehicle


4) CCS segment returning to growth


5) Future solutions to scale back HVAC system in the auto


6) Divesting non-core assets / reducing R&D & Corporate


7) Strong balance sheet & cash flow


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