Surveying the stock market right now is an interesting mix of contradictions. It seems that with very few exceptions, every industry in almost every sector has had to absorb some kind of impact from the global pandemic that that plagued the world through 2020, and remains an ongoing concern even as the first practical vaccines are being deployed and administered. Despite that reality, and the concurrent economic pressures that collapsed demand for a variety of goods and services from dining out, air travel and other activities we would generally define as important parts of an active social life, other industries have managed to adjust, adapt and evolve. Some businesses have thrived, while the limitations imposed by self-isolation mandates, shelter-in-place and quarantine orders and health recommendations have crippled others.
As 2021 begins, there is a clear desire not only to put the challenges of 2020 behind us, but also to look into this year and find reasons to believe the worst is also in the past. The expectation is that as vaccine administration expands across the global population, the pandemic will finally fade; most health experts are expecting that to become easier to see in the second half of 2021. Recent reports that show the pace of inoculation well behind projections, however seem to suggest that it could take much longer.
A change in political leadership in the U.S. is another element this year that I think could have a secondary effect on market activity. Generally speaking, the change from one President to the next has a mostly muted effect on market activity – but if the last four years are an indication, that may be less true this year. It’s fair to say that a big part of the market’s performance in the last four years came on the expectation of business-friendly presidential policies that included tax breaks and reductions, increased deregulation, and spending programs targeted towards specific sectors and industrial segments. The broad expectations for growth those policies encouraged even prompted analysts to coin the phrase “Trump trade” to describe stocks that would benefit. President-elect Biden has vowed to reverse many of those accommodative policies, putting some in corporate America on alert for more restrictive policies and regulations. While it remains to be seen what kind of actual impact the incoming administration will have, the tendency the market has displayed over the last four years to anticipate good news, and price it into stock prices, means that some kind relative impact could be seen in 2021. If the health crisis doesn’t abate as expected, and in fact extends even longer into the year than most of us hope, I think that sense of political uncertainty could also expand the broad market’s risk profile.
The market’s contradictory story right now is that while investors are anxious to be more and more bullish, and push stock prices to what many (including myself) consider to be exaggerated multiples, the fundamentals for a lot of companies, including the biggest and strongest names, aren’t really getting better – at least, not in a proportionate manner to the performance of their own stock prices. Evaluating the market right now, in most cases means determining how bad the damage has been and whether a company has the resources to heal itself in time. There are some good stories in that respect, as a lot of management teams have had the foresight to be conservative about how they managed their balance sheets and so appear to be in good position for the inevitable recovery, whenever it does come. Far rarer, however is the case where I find a company whose stock has mirrored the market’s rebound over the last several months and also seen its fundamental strength hold steady, or even improve, in a pandemic-drive world.
Garmin Ltd (GRMN) is an intriguing example of what I mean. A lot of stocks in the Technology space have performed pretty well during the pandemic, especially those related to stay-at-home work, streaming entertainment, or fitness. GRMN stands above the crowd in terms of fundamental strength. They haven’t been unaffected by shutdown conditions; as is the case for most stocks, earnings and revenues have been challenged throughout the year. Even so, this is a company, based in Switzerland, with a very impressive balance sheet, with other important fundamental metrics actually showing signs of improvement.
If you’ve bought a GPS device for your vehicle over the last decade and a half, 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, specifically for autos and boats – is seeing declining demand as smartphones include their own, free GPS-enabled navigation apps and services, this is a company that has been spending a significant portion 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 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 $22.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, at about 24.41% in the case of earnings, and 18.71% for Revenues. In the last quarter, earnings increased by 73.6% while revenues rose 27.5%. GRMN operates with an impressive margin profile; Net Income versus Revenues over the past year was 25.9%, and strengthened in the last quarter to 28.26%.
Free Cash Flow: GRMN’s free cash flow is modest, but healthy, at about $772.32 million. That number has managed to increase throughout the last year, from about $632.9 million at the beginning of 2020. Its current Free Cash Flow number translates to a Free Cash Flow Yield of 3.38%.
Debt to Equity: GRMN has a debt/equity ratio of .0 – meaning they carry no long-term debt. GRMN also has more than $1.65 billion in cash and liquid assets on hand – up from $1.4 billion a year ago. Along with their healthy operating margins, debt is a non-issue. 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 $2.44 per share, which translates to an annual yield of 2.04% at the stock’s current price. It is also worth mentioning that while many companies are reducing, or even eliminating their dividend to save cash, GRMN’s dividend has increased, from $2.28 per share in 2019.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $69 per share. That suggests that, despite the company’s fundamental strength, the stock is significantly overvalued right now, with about -42% downside from its current price. It is also noteworthy that the stock’s Book Value – what I like to consider a good barometer of a company’s intrinsic value – has increased in every quarter of the past year, from around $22 in mid-2019 to $26.69 right now.
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 from its March 2020, bear market low at $61 to its recent peak in December at around $123.50. It also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. Seeing the stock more than double in price in a nine-month period is impressive, to be sure. Current support appears to be at around $118, based on the stock’s consolidation along that price area over the last few weeks. That also puts immediate resistance at around $120, which has been the cap on any attempted moves higher over that period. A move above $120 will find next resistance at around $123.50, which also means that if bullish momentum can increase enough to push the stock above that point, it should find next resistance at around the $127 level. A drop below $118 should find next support at around $114, with additional downside to about $104 if bearish strength rises.
Near-term Keys: Given the fact the stock is significantly overvalued, I don’t think it’s practical to consider GRMN as 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 manages to push above $120, and you’re willing to work with very close price targets on short-term, momentum-based trades, you could consider buying the stock or working with call options, with a quick-hit target price sitting at $123.50. A drop below $118 would act as a strong signal to think about shorting the stock or buying put options, with $114 providing a good, early profit target, and additional profit potential to about $104 if bearish sentiment accelerates.