The effects of the coronavirus pandemic have manifested themselves in different ways throughout society. While the restaurant and the travel and leisure sectors have been hit hard, grocery and packaged-food companies have benefited. Those results are likely temporary, and those businesses should eventually see a normalization.
But some changes may be here to stay. Zoom Video Communications and Peloton Interactive are new to the scene, but have shifted the idea of what people can accomplish at home. Another shift that could be here to stay is the accelerated interest in the outdoor lifestyle. One under-the-radar winner from those trends is Garmin (GRMN 1.20%), a maker of outdoor recreation devices. After seeing its recently released third-quarter earnings report, shareholders may find it's time to buy more.
Image source: Garmin.
Bouncing back quickly
The pandemic hit Garmin's results in its second quarter, which ended June 27, as it did most consumer-facing businesses. Quarterly revenue dropped 9%, marking the first year-over-year quarterly decline since its fourth quarter of 2015. But as consumers adjusted to life during the pandemic, interest in Garmin's products accelerated quickly.
In its recently reported third quarter, the company had a strong 19% increase in revenue versus the 2019 period. That's even more impressive considering the company was seeing strong revenue growth for several years entering 2020.
Outdoor recreation grows
Garmin's fitness, outdoor, aviation, and marine segments have been growing steadily. Since the beginning of 2018, average quarterly growth in those four segments was 20%, 14%, 12%, and 20%, respectively. As they drive the business, the declining automotive segment has had less impact. The overall compound annual growth rate (CAGR) for the past three years is 9%, notwithstanding the second quarter 2020 decline from the pandemic interruption.
| Metric | 2020* | 2019 | 2018 | 2017 |
|---|---|---|---|---|
| Sales | $4 billion | $3.758 billion | $3.347 billion | $3.087 billion |
Data source: Garmin. *Estimate provided Oct. 28, 2020.
In the right place
Garmin has been successful transitioning from mainly a supplier of personal navigation devices to the premier GPS device maker for runners, bikers, boaters, hunters, and even pilots. The nonautomotive segments made up 85% of net sales in 2019, and that number continues to grow.
The company now finds itself in the right place at the right time in several ways. The pandemic has led more people outdoors, particularly to activities like running, biking, and boating.
Recreational boat manufacturer Brunswick (BC 0.72%) recently reported strong third-quarter earnings results. CEO David Foulkes said "very robust retail demand" drove sales up 26%, and the company reported a nearly 50% drop in dealer inventories compared to 2019. Garmin's 54% third-quarter revenue jump in its marine segment shows that the boating trend is not just specific to Brunswick.
Where it goes from here
Sales growth of 19% seems unsustainable when compared to the 9% CAGR over the previous three years. But Garmin has some catalysts that should support continued strength in the business. In addition to the rise in popularity of recreational boating, camping and RV vacations have taken off during the pandemic. RV makers like Thor Industries and Winnebago Industries are reporting record backlogs amid surging demand.
Garmin should be able to capitalize on the RV trend as well. It has recently launched its RV 890 navigator, designed specifically for the RV and camping lifestyle. This can be a catalyst for the lagging automobile segment, along with newly announced products being supplied directly to BMW and Daimler.
What investors love
On top of all that the business has going for it, Garmin excels at making what investors love: cash. It generated $236 million in free cash flow in the third quarter, and that was after increasing research and development spending by 18%. That cash more than covers the $117 million it paid to shareholders in the form of a dividend.
With approximately $2.7 billion in cash and marketable securities, and no debt, Garmin's balance sheet is pristine. That cash position translates to 14% of the company's total market capitalization.
Garmin checks all the boxes investors should prioritize: popular products, a growing market, an ideal balance sheet, and a price-to-earnings ratio under 19 (which is about average for its past five years). Shareholders also collect a nice dividend that currently yields about 2.35%. It's a good time to buy more shares if you are a Garmin shareholder and hadn't yet thought about adding to your position.
