Having a great balance sheet isn't the only reason to buy a stock, but it's a good place to start. An investor can rest easier knowing a company has a cushion for when the economy or business conditions deteriorate.
Garmin (GRMN 1.07%), which makes high-tech outdoor recreation devices, has such a balance sheet. It is debt-free, with $2.6 billion in cash and marketable securities as of the end of the most recent quarter. Just as importantly, the company has a successful business that generates significant cash flow to enable continued growth, while also maintaining the balance sheet and paying investors a generous dividend.
Image source: Garmin.
King of cash
Most people would quickly think of Apple (AAPL 0.51%) as the balance sheet king of the market. And for good reason. As of its most recent quarterly earnings period ending March 28, 2020, Apple reported $193 billion in cash and marketable securities on hand. That equates to 12% of its market capitalization, or $44.50 per share. Garmin has almost 14% of its market cap in cash and marketable securities. And that's not the only metric in which it compares well against Apple.
GRMN P/E Ratio data by YCharts
Garmin compares favorably in price-to-earnings and price-to-sales ratios, as well as dividend yield for shareholders.
Popular products
Maybe more important than the current balance sheet is the future potential for cash flow. Garmin has experienced continued growth in four of its five business segments for several years. Those four segments now make up more than 85% of total revenue.
|
Segment |
Q1 Fiscal 2020 Growth (YOY) | Fiscal 2017 to 2019 CAGR |
|---|---|---|
| Outdoor | 13.7% |
14.6% |
| Fitness | 24% |
17.2% |
| Marine | 21.7% |
16.6% |
| Auto | (16.7%) |
(14.6%) |
| Aviation | 10.4% |
21.1% |
Data source: Garmin Financial Filings. YOY = year over year. CAGR = compound annual growth rate.
This has given the company the ability to continue investing in the business through research and development spending as well as acquisitions.
Growing the business
Garmin has been investing back in the business for more than a decade. In 2008, the company strengthened its presence in Europe by acquiring its independent dealerships in Austria, Belgium, Denmark, Finland, Portugal, and Sweden.
Last year, it tapped into a growing trend by buying private indoor cycle company Tacx. In a promising sign, Garmin said in its first-quarter conference call that it has designated capital spending toward building a new manufacturing facility for Tacx in 2020, to keep up with demand.
Future outlook
There is no reason to think that the strong demand for Garmin's products is waning. Though there will be negative second-quarter impacts from the COVID-19 pandemic, there may also be encouraging trends. The pandemic has spurred a transformation in exercise and outdoor recreation for some.
Boating and camping seem to have increased in popularity. In a recent interview, David Foulkes, CEO of Boston Whaler and Bayliner boat maker Brunswick (BC 1.17%) said "demand really took off" in the second half of April 2020 and that it "seems to be very sustained" as it continued through May and June.
Recent consumer spending data also appears to be in Garmin's favor. The Wall Street Journal recently reported that "pent-up demand for outdoor leisure drove sales in sporting goods ... with sales up 48% nationwide by the week ended June 24" versus the year-ago period.
Holding shares "forever"
As an investor, it's smart not to say "never" or "forever." You have to be willing to change if the company changes direction, the business thesis changes, or something unforeseeable occurs. The COVID-19 pandemic wasn't foreseeable, but Garmin appears to be weathering it well, and may even see an acceleration in its business.
It's the type of event where businesses with rock-solid balance sheets can emerge stronger. Garmin is a shining example of that. Even if sales take some time to return to previous growth levels, investors get paid a nice dividend along the way. And knowing the company is also in a position to reinvest in the business means that the future outlook makes Garmin a stock to own for the long run.
