Famous investor Peter Lynch once said, "You won't improve results by pulling out the flowers and watering the weeds." Well-run, successful businesses (the flowers) tend to continue to outperform, and once an investor finds a company like that, it's just as important to keep focusing your investment resources toward helping those companies outperform in the future rather than pouring your water on the nearby weeds (speculative companies).
One of those "flowering" companies is Garmin (NASDAQ:GRMN), a maker of navigational devices used in automotive and recreational activities. In the last five years, its total return, including dividends, has more than doubled that of the S&P 500. And its future looks even brighter, led by several key areas of the business.
An evolution of Garmin's business
A lot has changed for Garmin in the last five years. In 2016, 29% of revenue came from the company's auto segment. But as personal navigation devices (PNDs) were replaced by smartphones or built-in automotive GPS systems, the segment went into a decline. Five years later, almost 90% of sales comes from its outdoor, fitness, marine, and aviation segments, and total revenue for 2020 has grown almost 40% over 2016.
The growth segments have benefited from Garmin's ingenuity and a shift in consumer behavior. New and upgraded products have gained popularity as the company increases its spending for research and development (R&D). In 2019, R&D spending grew 6.75% versus the prior-year period, but that spending growth increased 16.25% in 2020. That has paid off, especially with consumers showing added interest in outdoor activities partly influenced by the pandemic. Overall revenue growth of 11% in 2020 accelerated through the year, with a fourth-quarter increase of 23% over the prior-year period.
Why buy Garmin now?
Outdoor recreation, including camping and boating, has become more popular with consumers, and Garmin has been able to capitalize. For example, its new RV GPS Navigator is the latest and largest addition to its RV-specific GPS Navigator series, management says.
RV and boat manufacturers have been reporting strong sales and backlogs. David Foulkes, CEO of Brunswick (NYSE:BC), the maker of Sea Ray and Bayliner boats, said in its recent fourth-quarter and full-year 2020 earnings release that "continued strong performance in a robust marine retail environment" leads it to see "substantial growth opportunities" for 2021. RV retailer Camping World (NYSE:CWH) reported that its fourth-quarter 2020 revenue grew 17.5%, amid a year of declining product inventories and an increasing number of active customers.
Garmin's devices are popular with those same consumers. The pandemic-influenced trends accelerated throughout 2020, as can be seen in its year-over-year quarterly growth from the relevant segments.
|Segment||Q4 2020||Q3 2020||Q2 2020||Q1 2020|
Garmin's valuation is still reasonable
Garmin expressed confidence that the outdoor, marine, and fitness segments will continue to grow at double-digit percentage rates in 2021, and even sees growth from its automotive segment for the first time in years. If expectations come to fruition, and overall revenue increases another 10% in 2021, today's price-to-earnings ratio of approximately 24, though not cheap, is reasonable.
Garmin also just announced the intention to raise its dividend by 10% for a current dividend yield of slightly over 2%. And the company ended the fourth quarter with cash and marketable securities of approximately $2.98 billion, more than 12.5% of its total market capitalization.
Investors who have enjoyed the strong returns from owning Garmin stock should have more to look forward to. The company continues to invest in its business, has a large cash reserve, pays a nice dividend, and has products growing in popularity. All told, that makes now a good time to add more to an investment in this flowering stock.