Garmin GRMN shares have appreciated nicely over the past year, but I believe there’s further upside.
This is despite the negative political environment. It has in fact been seen that historically, political events like the impeachment of a president has had only a temporary impact on the stock market. Shares have instead traded on any number of other considerations, such as the state of the economy, the conditions impacting the industry, company-specific factors, and so on. So there’s no reason to think that this time will be any different.
As far as Garmin is concerned, the company is in good hands, it has a strong track record of delivering on its strategies and it last reported a classic beat-and-raise quarter. Plus, the valuation indicates that further upside is likely. Let’s see some details-
A Beat & Raise Quarter
Garmin had a strong second quarter with 7% growth in total revenue, and easily beating the Zacks Consensus Estimate by 3.9%. EPS grew 17% over the prior year, beating the Zacks Consensus Estimate by 16%. Gross margin expanded around 180 basis points (bps), operating margin expanded around 250 bps and operating income grew 18%. All of this goes to show that the company is very efficient at converting revenue to profit.
Moreover, the highest-margin Aviation segment grew gross margin by 78 bps, operating margin 191 bps.
Outdoor, with the second-highest margins, also grew gross margin by 49 bps although operating margin dropped 176 bps.
Marine was third, with gross margin expansion of 201 bps and operating margin expansion of 759 bps.
Fitness was fourth, with gross and operating margin contraction of 247 bps and 331 bps, respectively. The Tacx acquisition, which added the indoor category brought some inventory with it, and may have accounted for some of the margin pressure.
Auto saw gross and operating margin expansion of 567 bps and 882 bps, respectively.
It appears that the company is seeing increased competition in its wearable products from stalwart Apple AAPL and others like Fitbit FIT and Fossil FOSL, requiring increased investment in the business.
Garmin raised the guidance for 2019. Revenue is now expected to be $3.6 billion (previous $3.5 billion); gross margin 59.5% (unchanged); operating margin 23.2% (previous 22.7%); tax rate 16.5% (unchanged); and EPS $3.90 (previous $3.70). Revenue growth in the Aviation, Fitness, Marine, Outdoor and Auto segments is expected to be 17% (previous 10%), 13% (unchanged), 12% (previous 10%), 10% (unchanged) and -15% (previous -18%), respectively.
Delivering on Strategy
I first started looking at GRMN stock more than a decade ago. And in all this time, one thing that always shone through was the discipline in its management and its ability to deliver on key strategies.
So when smartphones rendered its personal navigation devices obsolete (and it was a business that contributed more than half its revenue and profit), the company was able to come up with the innovation and energy required to build out its other segments to offset the steady decline in auto (which includes PNDs). Today, Garmin remains the leading supplier of PNDs, but the secular decline in that business is being offset with steady growth in its other businesses.
The margins and profitability in each of those businesses continue to be worked upon and acquisitions have been smoothly integrated to build new product lines or augment an existing one.
Above all, it’s really comforting to know that Cliff Pemble, the person at the steering wheel, has been around forever and seen all the ups and downs and good and bad.
Valuation
Being the kind of company it is, Garmin has always traded at a premium to the S&P 500 and also its industry, which includes other buy-ranked companies like Fujitsu General Ltd. FGELF, KLA-Tencor Corp. KLAC, SMC Corp. SMCAY and Kopin Corp. KOPN. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
So it is more meaningful to compare its current performance with its performance over the past year. But just to give you an idea, the stock has gained 21.1% over the past year compared with the S&P 500’s 1.0% and the industry’s 10.4%.
So why do I think that there’s still upside left (from a valuation perspective)?
Based on its forward 12-month P/E, the stock is trading at 21.07X, which is closer to its median value of 20.46X than at either end of the high-low range of 23.78X to 17.28X. The S&P, which is also trading relatively close to its median value of 16.75X, is moving in a much tighter range of 17.63X to 15.09X. However, the electronics – miscellaneous products industry is trading at 16.42X, which is closer to the high end of its trading range of 16.79X to 12.72X.
On a price to trailing-twelve-months-sales basis, GRMN is trading at 4.64X, higher than its median value of 4.33X but comfortably within its high-low range of 4.99X to 3.47X. The S&P is trading close to its median value, but in a tighter range, as in the previous case. Also, we find that while Garmin is trading 7.2% above its median value, the industry is trading 12.2% above its median value.
On a price to adjusted free cash flow basis, Garmin is trading above its median value while the S&P 500 is trading at the median value and the industry is trading well below it. But as in the above cases, Garmin trades in a wider range, meaning there is more room for upward movement.
So the top end of its trading range over the past year is 19.8% above its median value and 17.4% above its current price. For the S&P 500, the top end of its trading range is 14.6% above the median value. Investors typically don’t pay as much for the industry’s cash flow, so the difference is significantly wider for the industry, at 38.4%.
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