The current market sell-off has been triggered by novel coronavirus fears and now an oil price war. Many businesses will be directly affected by both, but as with most market corrections, some babies are being thrown out with the bathwater.
Garmin Ltd. (GRMN +0.05%) stock rallied to more-than-a-decade high after reporting strong earnings last month. With the current market correction, an approximately 28% drop has brought the stock to a valuation level last seen a year ago. A review of how the underlying business has performed during that time, and how it looks going forward, should get investors interested in what looks like a hidden treasure in today's market.
Image source: Getty Images.
A strong business in a new direction
The company most recently reported earnings on Feb. 19, 2020. Even after raising guidance twice during the year, Garmin reported fourth-quarter and full-year 2019 earnings that had revenue 3% higher than its latest revised guidance, and earnings per share (EPS) up over 7% above the latest guidance revision. Full 2019 revenue growth clocked in at 12.3% year over year. Its conservative guidance bodes well going forward, as management's initial guidance for 2020 has revenue growing another 6.5%.
These results reflect the strong growth in the segments that now drive the business.
| Segment | Three-Year Compound Annual Growth Rate |
|---|---|
| Outdoor |
18.5% |
| Fitness |
8.3% |
| Marine |
15.7% |
| Auto |
(16%) |
| Aviation |
18.8% |
Data source: Garmin financial filings. Note: Percentages are calculated for full-year revenue from fiscal 2017 through fiscal 2019.
The growth in these segments comes from different end-user markets. For example, fitness has seen strength as the company enhances its GPS smartwatches with new features for runners, and now has contribution from the acquisition of indoor cycling and training firm Tacx. Outdoor has enjoyed growing contributions from adventure watches and golf offerings, while aviation sells in both the aftermarket and OEM (original equipment manufacturer) spaces. Marine has continued to refresh its lineup of advanced sonars, chart plotters, and cartography devices.
Together, the non-automotive segments have continued to drive more and more of the company's sales and expanded its profitability, as you can see below:
| Metric | 2019 | 2018 | 2017 | 2016 |
|---|---|---|---|---|
| Non-auto revenue as % of total | 85.4% | 81% | 74.8% | 70.1% |
| Gross margins | 59.5% | 59.1% | 57.6% | 55.4% |
| Operating margins | 25.2% | 23.3% | 21.7% | 20.7% |
| GAAP earnings per share | $4.99 | $3.66 | $3.68 | $2.70 |
| Pro forma earnings per share* | $4.45 | $3.69 | $2.94 | $2.83 |
Data source: Garmin financial filings and S&P Capital IQ. Pro forma earnings are provided for consistency as they negate the effects of foreign currency gains or losses, as well as certain non-recurring items such as occasional tax-related items.
Why valuation looks good
Typically conservative guidance would lead one to believe that double-digit sales growth could result again in 2020. However, the coronavirus outbreak and recent economic uncertainty may inhibit consumers going forward. Even if that's the case, if current guidance is achievable, the stock looks to be at a good level to buy.
With the recent market drop, the price-to-earnings ratio has gotten to the level of two years ago, when sales, earnings, and margins were lower than current, and presumably future, levels.
GRMN PE Ratio data by YCharts
The company expects a 7% dividend increase to be approved at its June annual meeting. This will equate to a 3% yield at current prices, which is well covered by free cash flow. It also has essentially zero debt, and ended 2019 with $2.6 billion in cash and marketable securities.
Garmin has successfully transitioned from a personal navigation device maker to a popular provider of equipment for fitness and various types of outdoor enthusiasts. Its stock price increase over the past year has reflected the recent business results. Today's market, however, has given investors another opportunity to get a piece of this under-the-radar story at a good valuation.
