GRMN - Upslope Capital - Garmin: A Classic 'Riches In Niches' Story
2023-07-26 07:00:00 ET
Summary
- Garmin stock is considered a good investment due to its high-quality business and reasonable valuation.
- Garmin is expected to benefit from existing trends such as rising interest in outdoor activities and health-tracking devices, as well as emerging changes in public health like new weight-loss drugs.
- Despite facing potential risks like manufacturing in Taiwan and competition from larger companies, Garmin's shares are seen as an attractive opportunity, especially with its potential growth in the Auto segment.
The following segment was excerpted from this fund letter.
Garmin ( GRMN )
Garmin is a leading technology business mostly known today for its smartwatches and fitness trackers (about half of sales), as well as navigation and communication systems (serving consumer, aviation, marine, and automotive end markets). There are three key reasons I believe the stock is interesting, and
I’ll elaborate further on each below:
- Surprisingly high-quality business – both qualitatively and financially – despite appearance as a consumer “widget” maker. This doesn’t make shares compelling today, but it means the investment should work out fine if I’m wrong on some of the factors noted below.
- Positioned to benefit from both existing secular trends and emerging changes to public health – rising interest in outdoors, adoption of health-tracking devices, new weight-loss drugs.
- Valuation is reasonable on conservative estimates that discount a credible management team’s outlook and the prospect of accelerated demand for health-tracking devices.
First, why would I describe a (mostly) consumer hardware business as “quality”? Due to quirks of its engineering-focused culture and a history of long-term involvement by its co-founders, Garmin is a classic “riches in niches” story. Its products mostly target niche markets – e.g. ultra-marathoner tracking, cockpit controls, marine navigation. This has earned Garmin a somewhat narrow, but extremely loyal user base and a brand that is the gold standard in its categories. It has also helped Garmin effectively hold its own against competitors both small and (extremely) large, such as Apple and Google (Fitbit).
Garmin has a history of owner-operator style management that continues to this day. One of the cofounders is the Executive Chairman and still owns 10% of shares. The other co-founder sadly passed away, but his son is on the board and the family still owns 10%. The CEO joined the company in 1989 – practically a co-founder himself. Due to all of this, Garmin has a track record of focusing on the long-term and doing right by its customers. As an example: the company is one of the few today that arguably under-monetizes its retail customers by charging only for hardware and offering the software/network for free. I consider this both an advantage and potential opportunity. They also have an intense focus on feature improvement that further bolsters the brand and customer loyalty advantages.
Financially, Garmin also exhibits a number of quality factors. While cyclically exposed, the company has a long-term track record of mid-single digit+ organic growth and steady mid/high-teen ROIC (again, steady despite competing against big tech behemoths). The balance sheet is rock solid, with ~2x net cash .
Looking ahead, I believe Garmin will continue to benefit from the long-term secular trends it has for some time (e.g. rising consumer interest in the outdoors and adoption of health-tracking devices). More interestingly, Garmin appears exceptionally positioned to benefit from emerging changes to public health (e.g. GLP-1 weight-loss drugs). Should we see a genuine revolution on this front, I believe we will see a wave of consumer interest in health and fitness. Will people actually exercise more? I don’t know. But, I am fairly sure that people will be interested in…signaling good health. As the gold standard for fitness tracking, Garmin seems the best choice on this front. A Garmin signals you’re serious about running, swimming, or biking; an Apple signals you’re available via text/email anytime, anyplace (sorry). One executive that’s become quite known for his fitness recently posted the picture below:
Source: Upslope, Mark Zuckerberg’s Instagram.
Valuation-wise, Garmin shares appear reasonable enough at 18x 2024 EPS (LT range of ~13-24x) and 12x EBITDA (typical range of ~8-15x). Despite a credible management team, consensus seems to discount some key growth initiatives – most notably in the Auto segment. While Auto is currently the smallest unit in terms of revenue (~7%), management is pointing to a 40% revenue CAGR over the next several years. While margins will be modest, this growth is underpinned by recent wins with BMW (infotainment-related) and others. Flipping the unit’s 2022 loss of ~$80mm to a positive contribution by 2024/2025 would have a meaningful impact on the bottom-line. No need to get too far ahead of ourselves, but the reemergence of a serious Auto unit due to the company’s ability to play a role in electric vehicle consoles and/or navigation could be an interesting longer-term opportunity. I note that Garmin has a solid history of reinventing itself. For Garmin’s core Fitness and Outdoor units, consensus estimates also appear reasonable or even conservative, as a simple reversion to pre-2020 growth rates (i.e. no upside from developments in public health) seems to be assumed.
Aside from the obvious cyclical risk of any consumer discretionary, Garmin also faces other potential risks. Most of its manufacturing is in Taiwan. Here, I worry about the impact that rising tensions and noise might have on the stock, even if a hot conflict never actually unfolds. The company is also still emerging from its COVID hangover. Like many other consumer discretionary companies – especially those with a fitness/outdoor focus – Garmin saw boom-times during the pandemic. While inventories have stabilized, they are still elevated vs. historical levels (there appears to be good reason for this). Lastly, Garmin competes head-to-head against much larger competitors – some of whom may care less about competing profitably in select categories. Despite these risks, I think Garmin shares represent an attractive opportunity that fits very well with Upslope’s defensive portfolio.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Upslope Capital - Garmin: A Classic 'Riches In Niches' Story