2023-05-25 12:07:10 ET
Summary
- Garmin has adopted vertical integration as its business model, thus giving it better control over its operations.
- Continued innovations and a diverse portfolio are the company's growth drivers that have contributed to its performance.
- GRMN has been paying dividends for over a decade and is a stable dividend provider with a high payout ratio.
Investment Thesis
Garmin Ltd. ( GRMN ) is a manufacturer and distributor of wireless devices worldwide. It operates through the Fitness, Marine, Aviation, Outdoor, and Auto OEM segments. The company sells its products through dealers, independent retailers, distributors, original equipment manufacturers [OEM], and online via its webshop.
During the previous year, the company's stock appreciated by approximately 3.15%, attributed to its vertically integrated business model, diversification, and ongoing innovation strategy. Its business model enables it to control every aspect of its production process and reduces its reliance on external suppliers. Through innovations and a diverse product portfolio, the company has maintained its growth and ensured its continued success.
GRMN has reported increased revenues in its respective segments except for the Outdoor segment. Overall revenues and earnings are anticipated to have a positive growth rate in the future. The company also has a long history of paying dividends and is a stable dividend payer with a high payout ratio.
Business Model
GRMN has adopted vertical integration as its business model since its establishment. Instead of outsourcing, the company's operations are in-house, giving it an upper hand as it has greater control over its production processes. It controls every aspect of its production process, from design through manufacturing, marketing, sales, distribution, product support, and recycling. This includes hiring high-quality staff who contribute to different stages of the production process.
Garmin has also managed to mitigate risks, focus on opportunities, and adapt to the dynamic environment-especially during these uncertain economic times - by investing in its operations, production centers, and processes. Through vertical integration, the company has limited its reliance on external suppliers, positioning it to manage its inventory costs better and comprehensively grasp its manufacturing lead times.
Diversification and Innovations
Garmin has spread its investments across different industries, allowing it to tap into emerging opportunities, access new markets, and mitigate the potential risks of investing in a single sector, thus enhancing its overall stability. The company provides creative solutions to emerging, complex problems through continuous innovation. The powerful combination of diversification and continuous innovation has ensured its long-term success and survival. Below are its diversified segments and their most recent innovations.
Outdoor segment: GRMN provides a range of products, including offerings for outdoor lovers such as divers, campers, and golfers, among others. The segment recently introduced new GPS handheld navigators, the GPSMAP 67 series and eTrex SE, the DRIVE 53 GPS navigator with built-in traffic features, and z?mo XT2, a rugged motorcycle navigation system.
Fitness segment: this segment includes indoor trainers and cycling computers and serves its customers by incorporating a variety of health monitoring features and sports apps into its smartwatches and wearables. Running watches Forerunner 965, and Forerunner 265 are its most recent releases.
Aviation segment: Garmin is a market leader in the sector comprising general aviation and small corporate jets and provides retrofit, forward fit, and portable aviation electronic devices. The segment provided communication, navigation, and flight control solutions.
Marine segment: the company is the largest global innovative marine electronics manufacturer, offering marine cartography, autopilots, and radar. The segment expanded its chart plotter portfolio through its newly introduced ECHOMAP UHD2 series.
Auto OEM segment: GRMN provides Auto OEM software, hardware, and infotainment solutions. It was made a standalone segment consisting of three categories: infotainment units, domain controllers, and all others, and it started reporting independently this fiscal year. The change in segmentation is a result of an existing new market. The automotive industry is witnessing a significant demand for EVs, with consumers moving from traditional fuel-consuming vehicles.
Although numerous capable suppliers are within the industry, not all can fulfill the rapidly growing demand for electronic and software components in vehicles. The company is tapping into this opportunity by leveraging its business model, technology portfolio, and global production footprint to manifest its vision as a global leader in supplying integrated electronic solutions to the automotive industry. The segment recently introduced an entertainment system for Yamaha's new models of sport touring two-wheelers, therefore expanding Garmin's market share in the motorcycle market.
Revenues from its segments and earnings
Garmin's net sales for the twelve months were $4.8 billion and $1.15 billion from its MRQ, down 2% from the previous year's period. However, a revenue surprise beat the consensus estimate by an impressive $52.86 million, an upgrade from the last three quarters' misses. Now looking into its respective segments, the Outdoor segment reported a decrease in revenues by 27% to $329 million from the prior-year quarter. The company attributed this to the category decline of its adventure watches year over year. Fitness and Auto OEM increased their revenues to $245 million and $81 million, respectively, up 11%; Aviation experienced a 22% increment to $214 million; and Marine increased 10% to $279 million.
Looking forward, for the fiscal year 2023, revenues from these segments are expected to move as follows: Fitness is projected to decrease 5% as it awaits to gain traction from new introductions; Outdoor is expected to grow about 2% driven by new product launches; Aviation and Marine expected to each experience 5% growth, driven by solid demand and by leveraging their strong market positioning, respectively; and Auto OEM is expected to experience a 30% growth also propelled by new model introductions. Overall revenue is forecast to grow 8.2% per year, 0.4% faster than the market, with a revenue annual growth rate of 7.8%.
Earnings reported TTM was $964.3 million and have notably grown 10.2% every year during the last five years. The company's earnings are also estimated to grow 8.6% yearly, although slower than the market. Moreover, MRQ's EPS beat the consensus estimate by $0.01, with an actual EPS of $1.02.
EPS is forecast to grow steadily at a rate of 10.1%, suggesting an anticipated improvement in its profitability, which could lead to an increase in stock prices and higher returns for its shareholders. Given its powerful arsenal of growth drivers, namely diversification and innovation, I am optimistic about the company's ability to attain and sustain the above projections.
Dividends
GRMN has been paying dividends consecutively for the past 16 years, surpassing the sector's average of 3 years. Its dividend payments have also been stable for the past ten years. Since 2013, the company has grown its annual distributions at about 5% YoY, from $1.80 to its recent yearly dividend of $2.92. This is relatively slow, but on the bright side, it shows the company's consistency in making dividend payments.
Garmin's current dividend yield is 2.8%, and its earnings more than cover it. Its four-year average yield is 2.91%, 0.87% higher than the sector average. This indicates it has consistently distributed higher dividend returns than its peers during the four years. GRMN also pays a significant portion of its earnings as dividends, with a payout ratio [TTM] of 58.4%, retaining the rest for reinvestment. The forecasted EPS growth suggests promising future dividends. Alongside its business model and technological innovations, I have confidence Garmin will sustain its dividend distribution policy and growth.
Conclusion
Garmin is a global manufacturer and distributor of a vast range of wireless devices functioning through various segments. It operates through a vertically integrated business model, enabling it to control its production processes. Through its growth drivers, diversification, and innovations, the company has attained attractive revenues and can sustain its long-term success and survival. It is also a stable dividend payer with a relatively high payout ratio. I am confident in Garmin's business model and growth drivers to ensure its long-term performance and success, thus being bullish on the stock.
For further details see:
Garmin: Powerful Arsenal Driving Success