I just noticed that Garmin (GRMN, Financial) is currently (July 2016) hitting 52-week highs. This is an interesting company, a pioneer in the field of GPS (Global Positioning Systems) and much more.
It is also an interesting company from an investing standpoint; as I wrote in a GuruFocus article in April of last year, “Although free cash flow has declined for several years, the absence of long-term debt and returning strength of EBIT and EBITDA align with the strong financial strength rating assigned by GuruFocus.” As it turned out, I was a bit early, and wrong, in seeing returning strength.
Getting back to the 52-week high, it turns out the company is simply regaining a bit of lost ground, as shown in this three-year chart:
And in revisiting the company, I was curious about its current valuation. After all, I had profiled and analyzed the company in April 2015, when it had registered as a Guru Bargain. Imagine my surprise when I saw its PEG ratio had shot up to about 60, even though the share price today is about the same as it was 15-months ago.
What is the PEG ratio?
The Price/Earnings Ratio divided by the Average 5-Year Earnings Growth, or PEG, comes to us from legendary mutual fund manager Peter Lynch. It was one of the tools he used become and stay the top fund manager for a couple of decades.
What he did was take the standard P/E Ratio, with which we’re all familiar, and put it in a robust context. That context, of course, is earnings growth. By combining the two measures, he was able to quantify the value of companies across industries, unlike the P/E which normally doesn’t help us much when comparing, let’s say, a bank and a railroad. For more, see the PEG Ratio page.
For our purposes, though, we don’t need to do any arithmetic. We can simply look at the PEG number on the Summary page of any stock; if we want detail, we click on the word PEG.
Stocks with a PEG ratio of less than 1 are considered under-valued, those between 1 and 2 are considered fair-valued, and those over 2 are considered over-valued. Thus, when we see a PEG ratio of 60 or thereabouts (GuruFocus shows a couple of different values), we should see red flags pop up. A ratio of 60 suggests the stock is wildly overvalued in terms of the growth of its earnings.
And, indeed, if we look at Garmin’s earnings over the past three or five years, we get a hint of what’s happening. Mathematically, if a P/E number is divided by an earnings growth rate of less than 1, the PEG ratio will rise exponentially. In this case, dividing the P/E of 18.13 by an earnings growth rate of 0.30 gives a PEG ratio of more than 60:
For context, let’s also look at the history of Garmin’s earnings since 2000:
By and large, it is not a pretty picture. Earnings hit a peak in fiscal 2007, and since then have mostly trended downward. Fiscal 2015 offered some hope, as the earnings recovered somewhat in fiscal 2014:
- 2013: $3.12 per share
- 2014: $1.88 per share
- 2015: $2.39 per share
The forecast for this year and next year, from the 14 analysts followed by Yahoo! Finance doesn’t offer much for those who have gone long on Garmin:
The analysts expect 2016 and 2017 to come in not far from the earnings of 2015.
In announcing the results of Q1-2016, the company offered the following guidance, “We are maintaining the guidance issued in February of approximately $2.82 billion of revenue and approximately $2.25 of pro forma EPS as our performance thus far is consistent with our expectations.”
While Garmin showed improvement in some segments for that first quarter, it had a problem with the Auto segment, its big money maker, “The auto segment posted a revenue decline of 11% primarily due to the ongoing PND market contraction and headwinds caused by additional revenue deferrals.”
Without a thriving Auto segment, we can’t expect to see much in the way of earnings growth.
Why has the Share Price Gone Up?
With the gloomy outlook, why have share prices risen since the beginning of this year? Take a look at the 1-year price chart:
Perhaps the answer comes from information in the dividend department:
At the current price, $45.43 at the close of trading on July 18, the stock yields a dividend of 4 and a half percent. That’s got to be attractive to anyone looking for income, and as we know, with interest rates at record lows, income investors have turned to equities.
Granted, the payout ratio at more than 80% might discourage some investors. But others might look at Garmin’s debt-free status and buy with confidence this company can continue paying an above-average dividend.
Yield and share price mirror each other, and when GRMN stock hit a low early this year, investors who bought then have been enjoying a yield of around 6%.
Also on the positive side, GuruFocus tells us Garmin’s 5-year dividend growth rate is 5.9%.
On the negative side, it’s hard to get past the lumpy and declining earnings. Earnings growth overall has been in negative territory for some time now, and that does not give us confidence in the company’s prospects going forward.
As I noted in a previous article, the company continues to invest in research and development, and really needs one of those innovations to take off. More specifically, it needs something to take the place of the continuing declines in the Auto segment.
Conclusion
Some 15 months ago, Garmin was a Guru Bargain stock, but it really can’t claim to be a bargain any more. With a PEG ratio of 60, plus or minus, it would have to be classified as over-valued. Way over-valued, in fact.
Now we need to look at it as an income stock, perhaps a substitute for a bond fund or another fixed-income vehicle. With a yield of about four and a half percent, it’s likely attracting buyers who want quarterly deposits in their bank accounts.
While the dividend payout ratio is on the high side, in the low 80s, there is some room for earnings setbacks.
If the company continues to increase the dividend an average of nearly six percent per year, the stock becomes even more attractive to weary income investors looking for a haven.
It’s hardly a stock for Warren Buffett (Trades, Portfolio), but may make sense to investors with different priorities and preferences.
Disclosure: I do not own any shares of companies listed in this article, nor do I expect to in the foreseeable future.
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