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Bull Of The Day: Garmin (GRMN)

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Garmin (GRMN - Free Report) reported earnings Wednesday morning and posted stronger than expected results beating both top and bottom-line estimates. Management was very optimistic in the earnings call with Garmin CEO Clifton Pemble asserting that this past quarter’s “strong results give us confidence to raise our full year guidance.” Sell-side analysts have been boosting EPS estimates for GRMN propelling this stock into a Zacks Rank #1 (Strong Buy).

The Business

A company that started as a pure-play GPS business was able to survive the smartphone revolution and now operates a diverse portfolio of recreational technology. Garmin produces a wide breadth of tech from smartwatches for golfing to marine trolling motors. The company is separated into 5 segments: fitness, outdoor, auto, aviation, and marine with revenue share being in that order.

Garmin is expected to post its strongest annual sales figures since the inception of the business in 2019, proving its ability to evolve to meet consumer demands successfully.

Garmin just posted a record high Q2 sales, its most robust quarterly revenues since 2009 demonstrating a 7% increase. The firm is dialing back its low margin auto segment, and if you adjust revenue for that decline, the firm exemplified 12% year-over-year sales growth. Since 2016 Garmin has been able to grow its topline year-over-year every quarter consistently.

Gross margins have continued to expand as the business realizes economies of scale. I believe this trend will continue as Garmin grows and focusses on higher margin production. As the firm dials back on its low margin auto segment, it focuses on growing its highest margin aviation division which grew 20% this past quarter and management is estimating that its full-year growth will be around 17%.

Garmin is now attempting to enter the commercial aircraft space, which would significantly increase demand for its high margin aviation products. If it can penetrate this market successfully, I believe Garmin’s share price will skyrocket.

Performance and Valuation

GRMN has grown 21% thus far in 2019, outperforming the broader market by 3.5% percentage points. I am confident that this stock has much more room to appreciate. Below is a 52 week performance chart for GRMN.

Garmin Ltd. Price and Consensus

Garmin Ltd. Price and Consensus

Garmin Ltd. price-consensus-chart | Garmin Ltd. Quote

GRMN is being valued at a 20.6x forward P/E, which is on the higher end of it 5-year trend and above the electronics industry average, though GRMN has consistently traded at premium to the broader electronics market.

Garmin shares are trading 36% off of its all-time high which it reached back in 2007. The annual EPS in 2017 was $3.82 with a dividend of less than 1%. Garmin analysts are estimating an EPS of $3.77 for 2019 with a dividend of 2.9%. GRMN has had EPS beats every quarter for as far back as I can see (2015), and I expect this trend will continue and 2019 EPS could hit record levels.

GRMN looks much more attractive today than it did back in 2007, but investors aren’t as excited about this ostensibly archaic name. Garmin is a sleeper that I predict will continue to outpace the broader market.

Take Away

Garmin CEO Clifton Pemble has driven this company to solid levels of profitability through savvy acquisitions and strong organic growth. I personally never would have thought this GPS company would have survived the smartphone revolution, but Pemble and his management team proved me wrong with sales expected to hit record highs this year.

Keep in mind that Garmin is a consumer-discretionary company meaning that it does well when consumers have extra cash to spend but is subject to sharp revenue declines in the case of an economic downturn.

If the economy can keep its status quo, I am confident that GRMN will continue to drive profitability to new levels. Garmin’s penetration into the commercial aircraft space would start a whole new growth chapter for the firm.

 

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