You may wonder – I do – why anyone would buy a GPS device for their car, when a smartphone and an app seem to do just fine. Yet Garmin Ltd. still managed to sell around $1-billion (U.S.) worth of the things around the globe last year.
The bad news for Garmin is that sales number was more like $2-billion in 2007, the company’s peak year of profitability (as measured by return on equity, per S&P Capital IQ).
The good news is that the company has largely remade itself as a maker of a wide range of connected devices for both consumers and commercial customers. The company’s fitness-device business, launched a decade ago, now makes up 20 per cent of the company’s sales. Add in other outdoor products, as well as sophisticated GPS for airplanes and boats, and Garmin has taken automotive GPS devices down to about 40 per cent of sales, from nearly 75 per cent in 2007.
In doing so, Garmin has also made itself a stock pick for those interested in the Internet of Things (IoT), the concept of a whole array of physical devices connected to the Internet, gathering and sharing data, and helping us make better decisions. Some IoT gadget makers, such as the company behind the Nest thermostats, have already been snapped up by big companies (à la Google) before they could sell their shares to the public. Others, such as active-camera maker GoPro Inc., trade at multiples befitting the hype stage of IoT (a forward P/E of 34).
Garmin, by contrast, has a forward P/E of around 15 – and yet it’s roundly unloved by Wall Street, with just five of 20 analysts rating the shares a “buy.” This, even as the shares trade closer to a 52-week-low than a high.
What’s the problem? Well, there’s the concern that the Apple Watch and other yet-to-be-introduced devices and apps will eat away Garmin’s fitness and outdoor business, making them fade just as badly as its auto GPS sales have.
With the current growth numbers, however, that day may be a ways away. Investors who think Garmin can remain a player in the field should be intrigued by the shares.
For the bull case, we turn to Mark Sue of RBC Dominion Securities’ U.S. research arm, who notes the $568-million in sales in 2014 for Garmin’s fitness business was 60 per cent higher than the year prior. This year should see 30-per-cent gains, he says.
Gross margins – revenue minus the costs of the product – were 63 per cent in the first quarter of 2015. Competitor Fitbit, which plans an IPO this year, reported gross margins in 2014 around 50 per cent. And despite the Fitbit competition, average selling prices for Garmin’s devices increased in 2014 versus 2013, Mr. Sue said.
What about that declining automobile GPS business?
Well, fitness should help cancel that out, with Mr. Sue expecting flat overall sales in 2015, a small gain in 2016, and single-digit growth in earnings. Importantly, fee cash flow should be steady, he believes, supporting share buybacks and a dividend, recently increased, that yields 4.5 per cent. He has a target price of $58, or 18 times his 2016 earnings estimate of $3.30 a share. (Garmin closed Thursday at $46.03.)
What’s the downside? Mr. Sue sees it at $44, if revenue declines 11 per cent this year and margins and profit follow. To introduce a more bearish view, however, we’ll cite Jeremy David of Citigroup Global Markets Inc., who cut his rating to “sell” in April, with a $42 target price.
Mr. David likes to look at Garmin’s business in two pieces, not the four segments the company uses: Sales to original equipment manufacturers (OEMs) of boats, planes and cars who embed Garmin systems in their products, and sales to consumers who buy the dashboard devices and the fitness products. Mr. David believes Garmin’s OEM revenue, about 30 per cent of the company, will grow at a 6 per cent annual clip through 2018. But the consumer business, about 70 per cent of the company, will decline by about 4 per cent per year, he believes.
His even more bearish scenario? Look to BlackBerry, he suggests.
Yikes! That sentiment is likely what’s holding back Garmin’s valuation. If the company can successfully navigate the next wave of devices, however, investors may find a path to profits.