Even when the COVID-19 pandemic is behind us, there are almost certainly going to be permanent lifestyle changes from it. People have been escaping social-distancing measures by heading outdoors and riding bikes, running, or walking, and fitness enthusiasts have brought exercise routines into the home. Health and safety considerations are at the forefront of travelers' minds too.
Investors looking to cash in on these trends should look at Garmin (GRMN 0.58%), which offers devices to people on the move, especially outdoor enthusiasts. A look at the company, and its four growing business segments, shows an already strong operation that may be in a sweet spot after the pandemic.
Image source: Getty Images
Transition to fitness and outdoors
Many investors may not have followed Garmin over the last decade as it transitioned from mainly a supplier of automotive personal navigation devices to a significantly more diverse product line for people with active lifestyles, including boaters and pilots. The sales mix figures below illustrate the notable shift.
| Segment (as % of revenue) | Fiscal 2019 | Fiscal 2013 | Fiscal 2007 |
|---|---|---|---|
| Outdoor | 24.4% | 15.6% | 5.4%* |
| Fitness | 27.9% | 13.5% | 5.4%* |
| Marine | 13.5% | 8.5% | 6.4% |
| Automotive/mobile | 14.6% | 49.5% | 73.6% |
| Aviation | 19.6% | 12.9% | 9.3% |
DATA SOURCE: GARMIN FINANCIAL FILINGS. TABLE BY AUTHOR. *DATA SHOWN AS EVEN SPLIT BETWEEN OUTDOOR AND FITNESS SEGMENTS, WHICH WERE PREVIOUSLY REPORTED AS A SINGLE UNIT.
Strong momentum
The transition in the business has been driven by strong growth in Garmin's non-automotive segments. Recently announced first-quarter results for fiscal 2020 showed continued momentum as auto becomes a smaller and smaller sliver of the company's top line.
| Segment | Q1 Fiscal 2020 Growth (YOY) | Fiscal 2017 to 2019 CAGR |
|---|---|---|
| Outdoor | 13.7% |
14.6% |
| Fitness | 24.0% |
17.2% |
| Marine | 21.7% |
16.6% |
| Auto | (16.7%) |
(14.6%) |
| Aviation | 10.4% |
21.1% |
DATA SOURCE: GARMIN FINANCIAL FILINGS. TABLE BY AUTHOR. CAGR = COMPOUND ANNUAL GROWTH RATE. YOY = YEAR OVER YEAR.
In the first quarter of 2020, the fitness and marine businesses both grew more than 20%, with the former benefiting from the early 2019 acquisition of indoor cycling company Tacx, while the latter saw continued strength from new products like chartplotters and advanced sonars.
Image source: Getty Images
Tapping into trends
First-quarter results were not overly affected by the ongoing pandemic, but management withdrew its fiscal 2020 guidance. Garmin believes it will remain profitable in the second quarter, though it expects a sharp decline in sales. During the earnings call, CEO Clifton Pemble noted, "On a consolidated basis, our April sales are trending about 40% lower than last year, as many retailers have curtailed operations and consumer activity has been severely limited by government restrictions. We expect these trends to continue throughout the second quarter as restrictions remain in place across much of the globe."
Looking beyond the current crisis, the popularity of the company's products may even expand. A focus on health and wellness should have more people looking at its fitness and outdoor offerings. The freedom offered by recreational boating and flying may become even more popular for those with means as well.
The trend for indoor cycling has helped make Garmin's Tacx acquisition a success. Some of the $140 million planned for capital expenditures this year is going to a new manufacturing facility that will open mid-year. Management said in the earnings conference call that it has "not been able to supply all the demand there."
Financial strength
Another factor that will stand out after the pandemic's economic fallout is financial strength. Garmin has a rock-solid balance sheet with zero debt and $2.6 billion in cash and marketable securities. Free cash flow in first quarter was $185 million, while it spent $109 million on dividends.
With that kind of cash position, investors can expect both continued investments in the business and potential increases to the payout, which yields 3.0% as of this writing. CFO Douglas Boessen commented, "Returning [an] attractive dividend to our shareholders is one of our current priorities for cash."
The company even continues to invest in the slowing automotive segment and expects a boost in that area later in the year after becoming a Tier 1 supplier (supplying parts directly to major vehicle manufacturers) and spending capital on a new European facility.
While investors can expect an atypical decline in year-over-year sales for the upcoming quarter -- and possibly further into fiscal 2020 -- Garmin has redefined its business with a track record of strong growth. Post-pandemic trends may play even further into these areas, making double-digit sales growth the norm once economies recover. Until then, investors can feel confident with Garmin's cash-rich balance sheet and healthy dividend.
