Garmin (GRMN 1.06%) just concluded an unusually weak fiscal year that saw sales drop while profit margins declined. The tech device giant was pressured by collapsing demand for its fitness products after soaring growth in earlier phases of the pandemic. Currency exchange rates and rising costs didn't help, either.
But smart investors know there's much more to this business than you might glean from simply relying on the last few quarters of results. Garmin has a proven ability to win market share across a wide array of tech niches. It's a highly profitable business, too, despite earnings pressures that will carry on into 2023.
Let's look at some standout reasons to like Garmin stock.
1. The business is diverse
While some tech device specialists are highly exposed to demand swings, Garmin isn't. Sure, in the last fiscal year, sales fell a brutal 28% in its segment that includes fitness trackers. That division grew 16% in the prior fiscal year.
But Garmin still managed essentially flat results in 2022 thanks to growth in other parts of its portfolio, particularly smartwatches. The company's marine and aviation segments provide solid protection against swift changes in consumer demand, too.
That's no fluke, as Garmin entered 2022 having boosted sales and earnings in each of the last six fiscal years. Investors prize that level of consistency, which is hard to find in the tech device industry.
2. The company is profitable
Garmin's 2022 marked a second straight year of falling profit margins. Operating income peaked at 25.2% of sales in 2020 before falling to 24.5% of sales in 2021 and 21.1% last year. Management is projecting another decline, with earnings dropping to roughly 20.3% of sales in 2023.
That slump looks much better with some context, though. Garmin entered this period with extremely high margins, for example, that rivaled Apple's (AAPL 0.64%) industry-leading result. And most tech companies, including Apple, have endured declines in this area due to currency-exchange shifts, slowing demand, and soaring costs.
GRMN Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
Against that backdrop, shareholders can be thrilled to see Garmin protecting most of its earnings power despite huge stresses on the business.
3. The stock is cheap
Garmin's valuation shift has made it an even more attractive stock for growth-focused investors. In retrospect, it was clearly overpriced in late 2021 when investors were paying 7 times annual sales for the business.
Wall Street seems to have overreacted in the opposite direction lately, though, with the price-to-sales ratio falling below 4 in early 2023. Apple is trading at over 6 times revenue.
Apple deserves a big premium for its wider sales base, cash holdings, and brand strength. But Garmin shares many of the same impressive characteristics that have made Apple such a reliable producer of market-beating shareholder returns.
Cautious investors might prefer to watch Garmin for a few more quarters for signs of a return to its prior path of rising profit margins and fast growth. You can pick up the stock at a compelling discount now, though, if you're willing to take on the risk of more volatility in the short term.
