Has Garmin Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Garmin (NASDAQ: GRMN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Garmin.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

2.1%

Fail

 

1-year revenue growth > 12%

6.3%

Fail

Margins

Gross margin > 35%

51.7%

Pass

 

Net margin > 15%

20.3%

Pass

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

2.80

Pass

Opportunities

Return on equity > 15%

17.9%

Pass

Valuation

Normalized P/E < 20

19.68

Pass

Dividends

Current yield > 2%

4.6%

Pass

 

5-year dividend growth > 10%

19.1%

Pass

       
 

Total score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Garmin last year, the company has gotten back one of the points it lost from 2011 to 2012. Unfortunately, the drop in valuation that earned the point came at the expense of shareholders, with the stock dropping about 5% over the past year.

Garmin has struggled ever since it lost control of the GPS tracking market. Once dominating the industry with its specialty receivers, Garmin now faces the uncomfortable situation of having just about every major cell-phone platform providing turn-by-turn navigation systems of their own, thanks to partnerships between wireless carriers and Garmin rival TeleNav (NASDAQ: TNAV  ) . The resulting pricing pressure has forced Garmin back to its niche marine and aircraft navigation systems business, but even there, Trimble Navigation (NASDAQ: TRMB  ) has carved out a competitive position that's undermining Garmin's traditional dominance. As GPS services become even more commonplace, it's hard to see how Garmin can maintain even its current level of growth.

Still, Garmin has been pulling out all the stops to try to diversify its business. Just last week, the company introduced a new line of pet products designed to train dogs. Although the products have little connection to its GPS business, Garmin hopes that they will demonstrate its ability to use technology from one business to create innovative solutions in unrelated areas.

Garmin has a flawless balance sheet and pays an incredibly attractive dividend, which explains part of why the stock has held up as well as it has. Nevertheless, Garmin's prospects to improve look incredibly limited, as it's unclear where sufficient revenue growth could come from to push Garmin any closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

The key to long-term winning stocks is to find them early when they're still in their hypergrowth mode. That's been a strategy that Motley Fool co-founder David Gardner has used to produce extremely strong returns for subscribers to his Supernova service. Learn more by clicking here to get instant access to a personal tour of the service, but don't delay -- this offer ends soon.

Click here to add Garmin to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2013, at 6:10 PM, AUricle wrote:

    Oooooh,...... lightning striking twice?

    I was VERY fortunate to pick up GRMN about 6.5 yrs. ago in the low 40's.....sold half of it around 98, and the rest at 112, after it had hit close to 120. Outstanding return for about an 18 mo. hold.

    Even happier that I sold when I did!

    I wouldn't bet the farm on ever regaining the dominant position it had back then.

  • Report this Comment On January 23, 2013, at 9:17 AM, marmurphy wrote:

    Garmin got a hit in the PND market. They certainly have not retreated into the niche markets of marine and aircraft as you suggest. Look at their products and where the growth is coming from in the last five years. Look at outdoar, fitness etc. Most commentators still see Garmin as largely depending on PND. Its profit rely less and less on PND's each year.

    John Murphy

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