GRMN is down -36% since last summer with solid fundamentals. Is it a good value?

In 2021, one of the common themes that helped buoy the stock market in general, and a lot of consumer-focused industries specifically was the reopening of business and social activity and the expected surge in consumer spending that would accompany it. While COVID didn’t abate as some hoped, and the “return to normal” was more like “return to kind of normal,” consumer activity did pick up in a lot of areas. That included areas that saw increases in consumer interest during the early stages of the pandemic like health and fitness; 2021 saw stickiness in some of those trends that gave a lot of companies that specialize in health and fitness-driven products a nice tailwind to work with. 

2022 has shifted the commentary a bit, putting the focus on higher-than-expected increases in consumer prices and inflationary pressures ranging from supply chain issues to conflict in Ukraine and its associated tensions between Russia and the entire Western world that have prompted the Federal Reserve to shift the accommodative policies it held firm on during the pandemic. That included ending its bond-buying program, with notes from recent meetings indicating plans to also start unwinding its balance sheet (Fedspeak for selling those bonds back to the market, which further tightens money supply and keeps rates higher) even after the first of multiple expected increases in the Fed Funds rates. This week added fuel to the bearish fire after the latest meeting suggested the Fed is considering more aggressive, half-point increases in its upcoming planned increases. That’s a significant difference from the quarter-point adjustments that have been the hallmark of Fed policy for more than a decade.

Increasing inflation fear is something that has impacted companies in the Consumer Discretionary sector in a negative way. For companies focused on the more specialized niche of health and fitness products (and the consumer wearables, like smart watches, that characterize the group), increasing interest rates increases the risk that the last two years’ pattern of positive fundamental performance could reverse. That’s why stocks like Garmin Ltd. (GRMN) have seen significant declines in price over the last several months. 

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 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, including auto and marine vehicle GPS systems. In the soon-to-be ubiquitous world of the “Internet of Things,” that suggests that GRMN is well-positioned to continue to be a major player in their particular market niche.

For a contrarian like me, seeing a stock like GRMN at the lower end of a downward trend that has seen the stock shed -36% of its value from a summer 2021 high automatically brings a question to mind: where is the stock’s value price? If it’s close to the current price, is there a useful opportunity to be had for a patient investor willing to take advantage of the opportunity to buy low and wait for the turn back to positive territory?

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 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declines by -10.4%, while sales increased almost 3%. In the last quarter, earnings increased a little less than 10% while revenues were 16.75% higher. GRMN operates with an impressive margin profile; Net Income versus Revenues over the past year was 21.72%, and narrowed somewhat in the last quarter to 20.55%. That drop in the last quarter is a fair reflection of supply chain challenges and constraints that have raised costs throughout the economy; even so, the company’s operating profile remains very healthy.

Free Cash Flow: GRMN’s free cash flow is modest, but healthy, at about $704.8 million. That number has decreased over the last year, from about $1.1 billion and $1.04 billion in the quarter prior. Its current Free Cash Flow number translates to a modest Free Cash Flow Yield of 3.2%.

Debt to Equity: GRMN has a debt/equity ratio of 0. GRMN also has more than $1.8 billion in cash and liquid assets. with no long-term debt. Along with their healthy operating margins,  that means that 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 $2.92 per share, which translates to an annual yield of 2.56% at the stock’s current price. It is also worth mentioning that while many companies reduced or eliminated their dividend to save cash beginning in 2020, GRMN’s dividend has increased, from $2.28 per share prior to the pandemic and from $2.44 per share after the first quarter of 2021. This is a strong sign of management’s confidence in their approach.

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 $116 per share. That suggests that, despite the company’s fundamental strength, the stock is fairly valued right now, with a useful discount price at around $93.

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 downward trend from its August 2021 peak at about $179 to its low at the end of February at around $106.50 per share. It also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. The stock has stabilized from that low point, and even started to move higher, establishing immediate resistance at around $121, with current support at about $113. The stock is very close to that support level right now, and a drop below that level could test the 52-week low at around $106.50. A push above resistance at around $121, on the other hand could have upside to about $128 before finding next resistance.

Near-term Keys: Given the fact the stock is fairly valued, with some near-term questions about inflation, interest rates, and their effect on consumer demand, 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 bounces off of current support at around $113, there could be a good short-term bullish trading opportunity, either by buying the stock or working with call options, using $121 as a near-term profit target and additional room to about $128 if buying activity increases. If, on the other hand, the stock breaks down, and drops below $113, consider shorting the stock or buying put options, with an eye on $106.50 as the target for closing that bearish trade.


X