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What's Wrong With Garmin Ltd.'s Fourth-Quarter Report?

By Anders Bylund - Feb 21, 2018 at 6:47PM

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The company did everything right, but shares fell more than 7% lower. Here's why.

Garmin (GRMN 0.40%) reported fourth-quarter results early Wednesday morning. The maker of navigation systems and wearable electronics beat the Street on both the top and bottom lines, issued optimistic guidance for the next fiscal year, and raised its dividend payouts. And then, share prices fell as much as 7.4% on the news.

What's going on here? Let's find out.

Garmin's fourth quarter by the numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$888 million

$861 million

3%

Adjusted net income

$150 million

$138 million

9%

Adjusted earnings per diluted share

$0.79

$0.73

8%

Data source: Garmin.

These results exceeded Garmin's own guidance targets on every line, from top-line revenue to operating margin and adjusted earnings. They also beat the Street's consensus estimates, which called for earnings near $0.75 per share on sales in the neighborhood of $870 million.

Digging deeper

The non-GAAP profit figures above exclude the effects of varying currency exchange rates. They also skip over a $4.1 million tax charge related to stock-based employee compensation and the revaluation of tax assets in Garmin's home country, Switzerland.

Garmin's marine, aviation, and outdoor departments all posted double-digit percentage growth in sales, year over year. The automotive division's sales fell 14%, in line with a negative long-term trend. In-car navigation systems have become an incredibly crowded market in recent years, and many consumers just use their smartphones instead.

Fitness sales increased by 1% in the holiday quarter as basic activity trackers are falling out of style. On the other hand, operating margin in this segment increased to 21%, up from 17% in the year-ago period, thanks to strong sales of more advanced and more profitable fitness devices. Overall, most companies and investors would be happy to trade in some stalled sales growth for much stronger profitability.

Quarterly dividend payments were set to $0.53 a share for the next four payouts, up from a rate of $0.51 per share that's been in place since the summer of 2015. At current share prices, that works out to a forward-looking dividend yield of 3.4%.

Looking ahead, Garmin expects continued softness in the automotive and fitness markets while aviation, outdoor, and marine sales should continue to deliver double-digit growth in 2018. All told, total sales should land near $3.2 billion in the next fiscal year with stable profit margins and earnings.

Four Garmin-branded smartwatches and fitness bands.

A selection of Garmin's high-end wearables. Image source: Garmin.

What's going on here, then?

So Garmin's shares fell in spite of a classic beat-and-raise performance.

But investors may have had good reason to expect more. This was actually Garmin's smallest earnings surprise since the fall of 2015, and the stock had nearly doubled the overall market's growth rates over the 52 weeks leading up to this report.

The company is doing so many things right that investors have come to expect the best out of every report. Falling just a bit short of perfection can trigger a quick price correction in situations like this.

There was nothing wrong with this report, and Garmin is showing an attractive combination of well-managed legacy operations and promising growth opportunities in the marine and aviation markets. If you wrote this stock off when the automotive decline started, you're missing out on a quality company

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