GRMN - Garmin: Resilient Financials And Sustained Product Innovation

2023-11-09 20:04:24 ET

Summary

• Garmin exceeded revenue and EPS projections for the second consecutive quarter, with a 12% surge in consolidated revenue.
• The company's diverse business segments, including fitness and aviation, saw significant growth in revenue.
• Garmin has a strong financial position with steady cash flow and a track record of surpassing market expectations for EPS.

Garmin Ltd. ( GRMN ) is renowned for its array of business divisions linked to wireless devices, an adept management team, steady dividend payouts, and a solid cash position. Over the past decade, investors have enjoyed a 140.11% return on the stock, with a sustained short interest at 2.22%.

Garmin published its Q3 2023 Earnings report , exceeding revenue and EPS projections for the second consecutive quarter. The company displayed a remarkable 12% surge in consolidated revenue during the third quarter, reaching $1.28 billion. It showcased a solid operating margin and earnings per share, with pro forma EPS increasing by 14% from the previous year. Overall, it's a dependable company with consistent growth potential. Yet, it's advisable to be cautious about the potential short-term impacts of acquisitions and new products on gross profit margins. Garmin has proven to be a rewarding stock for the long term and has improved its outlook for its FY 2023 results due to a strong performance in its most recent quarter. Furthermore, the company is entering the holiday season with a lineup of innovative products which could benefit the top and bottom lines. Hence, investors might consider adopting a bullish stance on this stock.

Diverse Company business segments

Garmin, founded in 1989, is a Swiss company recognised for its smartwatches and GPS units. It boasts a diverse range of business divisions connected to wireless devices and has expanded both organically and through acquisitions. Its revenue streams span across various segments, with Outdoor, Fitness, Aviation, Marine, and Auto OEM as the largest to smallest contributors. The company's recent acquisition of JL Audio is set to be integrated into the Marine segment. Reviewing its latest earnings report, all segments saw year-over-year revenue growth except for the Marine segment.

The fitness segment marked significant growth, enjoying a 26% surge in revenue. In aviation, revenue also rose by 5% to hit a third-quarter record of $198 million. The company's gross profit increased year-over-year, but there was a decline in the gross profit margin. However, the marine segment faced a 7% revenue decrease due to a softened market, though its performance surpassed quarterly expectations. In the aviation segment, a forecasted revenue decrease of approximately 10% in the fourth quarter is expected, primarily due to rectifying revenue from the supply chain constraints experienced in 2022.

Garmin has unveiled several new products, notably the Venu 3 smartwatch family, enriched with advanced health and wellness features. Additionally, the ECG App, compatible with specific products for heart rhythm monitoring, was introduced. These innovative product launches by Garmin, particularly the ECG App, have been pivotal in drawing in customers and significantly improving health management features in a competitive landscape. The timing, just before the holiday season, is perfect and is expected to positively impact the company's performance, likely leading to improved top and bottom-line results.

Financial highlights

Garmin is steadily progressing towards doubling its revenue over the past nine years, currently boasting a TTM revenue of $5.05 billion. The company has set an FY 2023 revenue target at $5.15 billion. While observing a minor decrease in the gross profit margin, this decline can be predominantly attributed to the recent impact of its acquisition.

Analysing the company's performance per quarter, it's noteworthy that out of the last eleven quarters, Garmin has exceeded the market's expectations for its EPS in ten instances. This consistent trend demonstrates a strong track record of surpassing projected EPS figures, indicating the company's robust financial performance and its ability to consistently outperform market estimations.

The levered free cash flow for the TTM stands at $613.8 million, showcasing a positive trend over the past decade, although it hasn't consistently shown a linear upward trajectory. This consistent generation of positive cash flow has been instrumental in the company's ability to deliver returns to investors, settle debts, and reinvest in its operations. The positive cash flow indicates the company's capability to manage its financial commitments, pursue growth opportunities, and maintain a healthy financial position.

Examining the balance sheet of the company, as of the last reported quarter, Garmin closed with a notable financial position, boasting approximately $2.8 billion in cash and marketable securities. It's essential to note the rise in the inventory balance, which escalated to $1.4 billion when compared year-over-year.

Valuation

Garmin has been a solid long-term investment, delivering a rewarding 140.11% return to its investors. Notably, the company has outperformed the S&P 500 index in the last four quarters. It maintains an appealing gross profit margin of 57.12%. However, according to Seeking Alpha's Quant rating, the stock's valuation stands at a D-, suggesting a possible overvaluation at its current price. Moreover, the price-to-book ratio is at 3.46, which could be deemed relatively high. Although the revenue growth over the last three years has been modest, resting at 8.66%, Garmin remains adept at generating cash and offers investors a dividend program showing a consistent five-year growth rate of 7.02%, coupled with a forward dividend yield of 2.55%. Furthermore, the future growth looks good if we see that the company has improved its FY 2023 forecast from revenue of about $5.05 billion to $5.15 billion and increased adjusted earnings from $5.15 to $5.25 per share for the full year. The company has a strong lineup of new products entering the holiday season, which should bring upside to the company.

Risks

Garmin operates across various business divisions, contributing to its overall performance. However, this diverse business structure also exposes Garmin to competition from various companies across navigation, wearables, fitness, and consumer technology sectors. While the company's multiple segments provide opportunities, challenges within significant segments can impact its performance. For instance, the marine segment currently faces a decline due to market softening, further affected by the recent acquisition, leading to a dip in the gross margin and segmental performance. The company's strategy of introducing new products and making strategic acquisitions may create short-term impacts on the gross margins of specific segments, affecting overall profitability. Additionally, Garmin's reliance on short-term retailer orders complicates quarterly growth prediction, resulting in revenue fluctuations and market performance variations.

Final thoughts

Garmin's consistent performance uptick, propelled by its innovative products like the ECG App, continues to resonate with customers, positively impacting its financial standing. The amplified interest in wearables, particularly high-tech smartwatches, has notably propelled the company's growth. The recent Q3 2023 report indicates Garmin exceeded revenue and EPS forecasts and anticipates robust upcoming results. With a revised FY guidance of around $5.15 billion in revenue and a pro forma EPS target of $5.25, the company seems well-positioned for the future, especially if we take into consideration a lineup of new products in time for the holiday season purchases. This encouraging outlook might prompt investors to consider adopting a bullish stance on this strong business.

For further details see: