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GRMN has great fundamentals – what about value?

Over the last month the market has been rattled by heightened geopolitical tensions from trade negotiations between the U.S. and China, and in the last week Mexico as well. This week the market has rebounded a bit, with the market moving upward in a big way yesterday on speculation that a deal with Mexico could be struck sooner than later, averting the tariffs President Trump has threatened against our neighbor to the south. It is interesting that as I survey a variety of stocks on a daily basis, I have been seeing drags in the most recent quarterly reports on earnings, free cash flow, and operating margins for a variety of businesses that have to contend with risk exposure from tariffs, most particularly as they relate to China.

How do you counter that risk? It isn’t easy to do, especially since the longer tariffs continue, the more likely they are to keep dragging on those companies, but also to begin to have a ripple effect across a variety of other businesses as well. One way is to look for companies that have less direct exposure from business operations in that country, or relationships with Chinese companies, and another way is to start looking for stocks that might have a more defensive posture to work with if slowing earnings growth eventually turns into an actual, broad economic downturn. Another method is to look outside the borders of the United States. That isn’t guaranteed to work, of course, since companies in other countries may be exposed to tariff and trade risk, directly or indirectly; it also means that you have to consider the effect of slowing global growth. That said, if you can find a multinational business that isn’t headquartered in the United States, but gives good information to analyze, you can find some interesting alternatives.

Garmin Ltd (GRMN) is an intriguing example of what I mean. While a lot of companies – U.S. and non-U.S.-based – are showing the effect of slowing growth and direct impact from tariffs, GRMN stands above the crowd in terms of fundamental strength. They haven’t been unaffected in the last few months by market tension, or by some of the broad economic factors I mentioned; after climbing more than 50% from January to mid-April, their stock price has retreated back by almost -13% to its current level a little below $80 per share. Even so, this is a company, based in Switzerland, with a very impressive balance sheet.

If you’ve bought a GPS device for your vehicle over the last decade and a half, or a wearable fitness tracker, or even a smart watch, then there’s a good chance you’ve heard of GRMN. And while it’s true that the market they cut their teeth, and are most known for – personal navigation devices – is seeing declining demand as smartphones include their own, free GPS-enabled navigation apps and services, this is a company that is spending more than 19% of its operating budget on research and development, aggressively expanding its portfolio of GPS devices and solutions into a much broader spectrum of applications. In the soon-to-be ubiquitous world of the “Internet of Things,” GRMN seems to be well-positioned to continue to be a major player in their particular market niche. Is the stock a good value at its current price? That’s a little different question. Let’s dive in.

Fundamental and Value Profile

Garmin Ltd. (Garmin) and subsidiaries offer global positioning system (GPS) navigation and wireless devices and applications. The Company operates through five segments. It offers a range of auto navigation products, as well as a range of products and applications designed for the mobile GPS market. It offers products to consumers around the world, including Outdoor Handhelds, Wearable Devices, Golf Devices, and Dog Tracking and Training/Pet Obedience Devices. It offers a range of products designed for use in fitness and activity tracking. Garmin offers a range of products designed for use in fitness and activity tracking. Its aviation business segment is a provider of solutions to aircraft manufacturers, existing aircraft owners and operators, as well as military and government customers and serves a range of aircraft, including transport aircraft, business aviation, general aviation, experimental/light sport, helicopters, optionally piloted vehicles and unmanned aerial vehicles. GRMN’s current market cap is about $15.5 billion.

Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased modestly, at about 7.5% for each metric. In the last quarter, earnings decreased sharply, at -28% while revenues dropped almost -18%. GRMN operates with an impressive margin profile; Net Income versus Revenues over the past year was 20.7%, and narrowed slightly in the last quarter to 18.2%.

Free Cash Flow: GRMN’s free cash flow is modest, but healthy, at about $711.92 million. That translates to a Free Cash Flow Yield of 4.68%.

Debt to Equity: GRMN has a debt/equity ratio of .01. Until the last quarter, their balance sheet reflected zero long-term debt, but this number did increase in their last earnings report to $45 million. By contrast, GRMN also has more than $1.3 billion in cash and liquid assets. Along with their healthy operating margins, debt is a minor concern. GRMN has plenty of financial flexibility to pay dividends, buy back shares, and keep investing in themselves to continue innovating and finding new markets to expand into.

Dividend: GRMN pays a dividend of $2.28 per share, which translates to an annual yield of 2.91% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GRMN is $21.79, and which translates to a Price/Book ratio of 3.59 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.82, which means the stock is actually overvalued right now, by about -21.5%. That is supported by a Price/Cash Flow ratio that is more forgiving, but still about 5.5% above its historical average. The stock’s fair value price, based on Price/Book is $61.45, and a truly useful bargain price isn’t likely to be seen unless the stock drops to at least $60.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend over the past year, from about $59 to its mid-April high at around $90 per share. It also provides the range to calculate the Fibonacci retracement lines shown on the right side of the chart. Since that April peak, the stock has dropped back sharply, but appears to be finding a useful support point at about $76 per share. As of yesterday’s close, it looks like the stock is breaking resistance from the $38.2% Fibonacci retracement line, which could give the stock some good short-term bullish momentum. Immediate resistance is likely around $83 based on pivot low in early April around that level. If the stock breaks support with a move below $76, I think it is likely to drop straight past the 50% Fibonacci line and find its next support level at around $71.

Near-term Keys: Given the uncertainty in the broad market, and the fact the stock is still overvalued, I think it’s hard to suggest GRMN is any kind of good value right now. In the long-term, there is more risk than reward for this stock, but its fundamental profile does mean that it is worth keeping in a watchlist and paying attention. If the stock follows through on the bullish momentum it has built so far this week, there could be a good short-term bullish trading opportunity, either by buying the stock or working with call options. If you choose to take that trade, look for a short-term exit target at between $82.50 and $83, and don’t hesitate to lock in profits if the stock gets there quickly. If, on the other hand, the stock break down, and drops below $76, consider shorting the stock or buying put options, with an eye on $71 as the target for closing that bearish trade.

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