Listener Question: What About Garmin?

Apple (AAPL 0.64%) and Fitbit (FIT) aren't the only players in the smartwatch game. In this episode of MarketFoolery, host Chris Hill and analyst David Kretzmann dive into Garmin (GRMN 1.06%), the technology company that you might remember getting completely crushed by GPS-enabled smartphones a few years ago. Things are looking up for Garmin, and long-term investors might want to take a closer look at the company today.

Also, the two discuss Microsoft's (MSFT 1.65%) acquisition of GitHub, which is set for a tidy $7.5 billion in stock, and why Microsoft's buyback plan is such a head-scratcher in light of it. And, if you missed this year's FoolFest, Chris and David talk about some of the most exciting highlights. Tune in to find out more.

A full transcript follows the video.

This video was recorded on June 4, 2018.

Chris Hill: It's Monday, June 4th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, it's David Kretzmann, fresh from the weekend, and fresh from FoolFest.

David Kretzmann: Absolutely!

Hill: We're going to talk a little bit about FoolFest, we're going to share some highlights, we're going to dip into the Fool mailbag. We have to start with the deal of the day, and that's Microsoft buying GitHub for $7.5 billion in stock. 

I'm sure at least some of you are saying, "What in the world is GitHub?" It's a coding platform. This is one of those situations where the big tech company has their own version of something, it doesn't work as well or it's not as popular, and they just say, "You know what? We're just going to shut this thing down and we're going to go out and buy that." Microsoft had CodePlex and they shut it down a year ago because it just wasn't that popular as GitHub.

Kretzmann: GitHub gives them what seems like a burgeoning community of software developers. As we know from former CEO Steve Ballmer, Microsoft loves developers. If you don't know what I'm referring to, [laughs] go to YouTube and search Steve Ballmer developers. It'll be a minute of your day well spent. Anyway, I think this makes sense for Microsoft. They have a long focus on software development, and this brings more and more of those developers, open-sourced projects and stuff under the Microsoft umbrella. It makes sense. 

The main thing that I do question about the acquisition is, as you mentioned, they're paying for it completely with shares, but they're also going to offset that dilution by ramping up their stock buybacks. They've already been buying back stock the past several years. Basically, they're saying, "We're going to dilute ourselves, we're going to issue shares to make this acquisition, but then we're going to buy back shares." That's a little bit backwards to me. If your stock is expensive, go ahead and use that stock as a currency to make an acquisition. But if your stock is expensive and you're making acquisitions, you probably don't want to be buying back stock at the same time. From a capital allocation perspective, it's hard for me to really make a whole lot of sense out of that. 

I think in this case, Microsoft is kind of caught with their pants down, because they've been making tens of billions of dollars of buybacks the past few years. At this point, I just take a step back and I think, why not use your $43 billion in net cash to pay outright for GitHub, rather than relying on stock? Anyway, that's the main question mark I see with the deal, but otherwise, it probably makes sense.

Hill: That was my only question, as well. Microsoft does not have Apple levels of cash, but they have cash.

Kretzmann: They have plenty.

Hill: They have plenty of cash. One of the things I was just wondering -- and there's no earthly reason that Satya Nadella and his team would ever disclose this -- but it did make me wonder, they're not doing that with their cash, what are they saving it for? It makes me curious if they are getting ready for another deal that is going to involve some cash. Or, maybe they're just thinking more along the buybacks lines.

Kretzmann: I just don't see what they accomplish. They're still spending the cash on buying back the stock. So, why not, from the get-go, just use cash for the acquisition? In this case, they're doing both. You're kind of double-dipping. 

Basically, when you're a company, you want to buy back stock when you think your shares are undervalued. And when your shares might be on the pricier side of things, it totally makes sense to use that as a currency to make acquisitions. In this case, they're trying to do both. And it just seems inconsistent. I'm not really sure what the game plan there is.

Hill: One more thing regarding Nadella, this acquisition moves Microsoft as an overall business further and further away from the Steve Ballmer era. This is just one more step in that direction. And by the way, good for Microsoft and good for their shareholders.

Kretzmann: Yeah, that's the direction you want to be moving. And, as much as I am bringing up dilution, it is minor. This will dilute less than 1% of shares outstanding. They'll buy back, I think, over $30 billion. They have a share buyback authorization, I think, of $30 billion now. The company is still swimming in cash, generating a ton of free cash flow each year. From a cash perspective, the company is still on very solid ground.

Hill:​ Our email address is [email protected]. From Christian Pike in Tulsa, Oklahoma. Christian writes, "Last month on Market Foolery, an in-depth comparison was made between Fitbit and Apple Watch. To keep things short and to the point, I'm curious why Garmin wasn't thrown into the comparison. It seems like everyone I know, including myself, who's into fitness owns and prefers Garmin watches. With Garmin also sitting on a pile of cash and having a seemingly solid aviation avionics business, I'd love to hear your expert opinions on this company. Thank you all. Stay awesome!" Great question. Just as an aside, have you ever been to Tulsa?

Kretzmann: I might have driven through it, but I don't know if I've ever stopped in.

Hill:​ I've never been to Tulsa, but the more I read about it and hear about it, the more it seems like one of those cities I need to get to at some point.

Kretzmann: Let's make it happen! Road trip! [laughs] 

Hill:​ [laughs] It's not close to where we are, but, yeah, we'll hit the road.

Kretzmann: A jaunt to the Midwest.

Hill:​ A couple of days, we'll just do a tour of the Midwest. It's a great question. I mean, when you look at Garmin, certainly, over the past year, the stock has done not just better than Fitbit -- because, let's face it, a lot of stocks have done better than Fitbit over the last year -- but Garmin has also outpaced the market over the past year.

Kretzmann: It surprised me. Over the past three and five years, Garmin has outperformed the S&P 500, as well, just by a little bit, but nonetheless still impressive, because I think this is a company that a lot of people have written off over the past decade. If you look at a chart of Garmin from 2000 to 2008, the stock was a 10-bagger over that time period. But then you had the recession come, the iPhone and smartphone revolution really took away the need for a lot of people to buy a stand-alone GPS device. 

But the company today is actually nicely diversified. They have five different segments. They have Automotive, Outdoor, Fitness, Aviation, and Marine. Over the past decade, they've really transitioned from most of their revenue coming from the Auto segment to now, Outdoor and Fitness is really what's driving that. 

To me, it seems like the company is really focusing a little bit more on niche segments. They have GPS trackers for golfers. We'll have to talk to JaMo, Jason Moser, when he's back in the office, see if he's ever used that to track his swings or the distance of the hits. And they do have some of the smartwatches and things of that sort, where they're more directly going up against Fitbit and Apple Watch, more the consumer devices. But then, in the meantime, they have a nice couple of segments with GPS trackers for planes and pilots and sailors and people out on the water, fisherman, all that kind of stuff. 

The one issue is, the company really isn't growing all that quickly. I think you're seeing that Auto segment shrink. In meantime, overall revenue last year, for instance, only grew 2%. Operating income expanded a little bit more beyond that, so they are expanding margins a bit. But this is not a fast-growth company. They're generating about $600 million in free cash flow a year. Most of that, they're paying out in the form of a dividend. Right now, the dividend yield is actually attractive. It's about 3.3%. A couple of years ago, it was actually as high as, I think, 5.6%. From that perspective, compared to a Fitbit, Garmin is much more diversified. They don't have all their eggs in one lousy, mediocre basket. [laughs] Which is really the situation Fitbit is in. But, even so, they're still far behind the progress that Apple is making with the Apple Watch, which is growing in the double digits. Meanwhile, Garmin is just inching out a little bit of growth each year. But, I'm impressed with the company. They have over $1 billion in cash, free cash flow production is solid, they have a nice, diversified business. You could put your money in worse businesses, but this isn't going to be a fast grower.

Hill:​ It's interesting. When Christian was referring to his friends, people who are fitness buffs, we have all kinds of Slack channels here at The Motley Fool. One of them is for people at the office who run. I don't have a Garmin watch or any kind of smartwatch when I'm out there running, but there are plenty of people in our Fool running channel who definitely prefer the Garmin devices. 

A couple of thank yous before we get to FoolFest. First, thank you to everyone who came out to our listener meetup in D.C. last Wednesday. We had a great time at TAKODA, which is in the Shaw neighborhood in D.C. Fantastic place!

Kretzmann: Awesome!

Hill:​ Thanks to Kristine Harjes for finding TAKODA and setting all that up. And, thank you to everyone who came to FoolFest. We had hundreds of people here on Thursday and Friday. A bunch of people came up and mentioned that they listened to the podcast, which is always great. It's always wonderful to meet people who listen and find out where they are when they listen and what they're doing and all that sort of thing. 

And, apologies to the few people that I spoke to who were clearly disappointed to talk to me in person, because when they listen to the podcast, they listen at a greater speed, they listen at 1.5X speed, so talking to me in person was an inferior version of my voice.

Kretzmann: Oh, it throws me off, too. I listen to our podcasts at 1.5X speed. I think I've told you at some point, it sounds like you're talking through molasses or something in real time. You're not the only ones, listeners.

Hill:​ In terms of the event, obviously, you were on the main stage. You were part of one of the panels that we had up there. You were in breakout sessions. And you got a chance to observe some of the other stuff going on there. As you step back and look at two days' worth of our investment conference, what investing takeaways do you have? Whether it's, "I'm more interested in this than I used to be," or something that you heard from someone else?

Kretzmann: I'd say, one of the stocks I want to take a closer look at is one that Aaron Bush mentioned on our main stage presentation to kick off the day on Thursday, and that's JD.com. I think he made a compelling case that JD, which is basically the second-largest e-commerce retailer in China behind Alibaba, he made a compelling case that the company is probably being undervalued lately. The stock has been hit in recent months, I think mainly over concerns that their margins are being suppressed, and, how likely is the company to be able to raise margins when they're going up against increased competition from Alibaba? 

But, you have a founder-led company there growing very quickly, investing in their own fulfillment and shipping and logistics infrastructure, as opposed to just that pure marketplace model that Alibaba has focused on. I do own a little bit in my portfolio, but that's one I want to take a look at, because I think there's an interesting case to be made that the core retail business is being undervalued. They do have a couple of other branches of the business, which have been valued at a higher multiple. Anyway, from an investing perspective, that's certainly one stock that I want to take a closer look at.

A lot of impressive presenters. I wasn't able to see them all live, but over the weekend, I rewatched Tom Gardner's interview with Randi Zuckerberg, who is, among other things, a brother of Mark Zuckerberg --

Hill:​ Sister.

Kretzmann: Sister. Well, you know. [laughs] We're not going to edit that out. That would be interesting. But, very impressive. She spent a lot of time at Facebook in the early days. She focused, among other things, on Facebook Live, creating that product. She's an accomplished VC investor. I really enjoyed hearing her insights about Facebook, the world of VC investing, particularly focused on female entrepreneurs and things of that sort. A lot of takeaways there.

I was also pleasantly surprised that we had a lot of listeners come up and reference the Kretzmann-Gardner Continuum.

Hill:​ Yes! [laughs] 

Kretzmann: I was surprised about that. I was like, does anyone really pay attention to that? Oh, yes, they do! That was a great surprise.

Hill:​ This is something that has come up on David Gardner's Rule Breaker Investing podcast. For those who are unfamiliar, a brief synopsis of the -- I think, one of the things that's up for debate is, is it the Kretzmann-Gardner Continuum or the Gardner-Kretzmann Continuum?

Kretzmann: I think I said it wrong, it's actually the Gardner-Kretzmann Continuum. GKC score is what we've been referring to it as. 

Hill: There you go.

Kretzmann: I was giving myself a little too much credit there. Can't take the thunder from David. Basically, it's the amount of stocks you own divided by your age. I think, when David and I first came up with the score, it was largely David coming up with it, and he was kind enough to lump me into it. This was on a Rule Breaker Investing podcast, I think two months ago, if anyone wants to go back and find it. 

When we came up with it, David, as someone who's in his mid-50s and owns about 55 stocks, he thought a score of one is a sweet spot, so you should roughly own as many stocks as your age in years. But, for me, I'm in my mid-20s, and I own closer to 75 stocks. So, I'm thinking, OK, the goal of the GKC score should be to have at least one or higher. 

Just a fun, random little metric that we came up with. You probably won't hear that referenced outside of The Fool, but I was very flattered that a lot of members were mentioning that to me.

Hill: The one other thing I'll throw out there is, we have main stage presentations, and then in the afternoons we have breakout sessions that people can essentially choose their own adventure and do. The session that I heard that was name-checked the most at the receptions at the end of the day, both on Thursday and Friday, was the one that Andy Cross and Ron Gross did, the When to Sell. 

Not just that people were complimentary of the way that Andy and Ron ran that session, but it's just a reminder that, all of us -- this is not a question that novice investors only wrestle with. Even the most experienced investors are dealing with when to sell. We all have our own situations. We all have, "Do I sell these stocks to fuel further purchases?" And, by the way, this is something I'm personally evolving on in my position. In the past, that's how I have viewed a way to buy different stocks. I'd say, "Well, I'm going to sell these and I'm going to buy these other ones instead." And now, I'm starting to move over toward the idea of, as we've talked about before, in some cases, you're better off just never selling, in part because sometimes things rebound. Otherwise, it's like, well, if I sell my Under Armour now, how much money am I actually going to get? I'm so far underwater on that, it's like, maybe just hold onto it, maybe Plank turns it around. We'll see.

Kretzmann: Yeah, it might not help you too much. I think that's sort of the mindset that I've taken more and more, just thinking about portfolio management. Especially when you have years or decades in front of you to invest and continue to add to your portfolios, I think the urgency to sell becomes less and less. It just matters less and less the longer your time horizon is. 

It was funny that you mentioned that session with Ron and Andy. After that session, I was talking to Ron outside when we were waiting for the cocktail hour to start, and he mentioned, "I'm much more structured with my presentation approach, and Andy just gets up there and he's free-flowing and off the cuff." But it sounds like they struck a right balance, if members were praising it. So, well done, Ron and Andy!

Hill: David Kretzmann, thanks for being here, man!

Kretzmann: Thanks, Chris!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!