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Omar Venerio
ovenerio
Articles (1437) 

Garmin Is Somewhat Expensive At These Levels

December 18, 2014 | About:

In this article, let's take a look at Garmin Ltd. (NASDAQ:GRMN), a $10.32 billion market cap company that provides navigation, communications and information devices for the aviation, marine, general recreation, automotive, wireless and OEM markets.

Innovation and R&D

The company operates in five reportable segments: outdoor (17% of total 2013 revenues), fitness (almost 14%), marine (8%), automotive/mobile products (49%) and aviation (13%), which consists of panel mount and portable products for use in general aviation aircraft.

The company focuses on innovation and the introduction of new products. These constitute a competitive advantage over its peers. Part of the secret is that engineering and manufacturing processes are vertically integrated, and this contributes to reduce times.

Further, investments on research and development (R&D), almost 14% of 2013 annual sales, help the firm to gain market share, especially against TomTom.

Penetration

Garmin plans to penetrate in growth potential business, at a premium until competitors entered. Also, it has a good position in some high-end niche markets that make it difficult for competitors to enter.

Return on invested capital

The company's return on invested capital (ROIC) has fallen after the 2007 peak of 29% in 2007. Then, it declined steadily over time and hit 10% last year.

Risks

One of the major threats the company faces is the enormous exposure to the automotive market. Further, it has to be aware of constant development in this industry.

Revenues, margins and profitability

Looking at profitability, revenue grew by 9.73%, but earnings per share declined in the most recent quarter compared to the same quarter a year ago (-$0.76 vs $0.96). During the past fiscal year, the company increased its bottom line. It earned $3.12 versus $2.77 in the previous year. For the next year, Wall Street expects a contraction of 0.3% in earnings ($3.11 versus $3.12).

The gross profit margin is considered rather high; it is at 58.10%, and it has increased from the same quarter the previous year. The net margin is at 11.23%, which is ranked higher than 89% of the 2,640 companies in the Scientific & Technical Instruments industry.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

GRMN

Garmin

8.98

KOSS

Koss Corp

-33.13

MCZ

Mad Catz Interactive Inc

-26.52

SNE

Sony Corp

-9.65

JAH

Jarden Corp

7.93

 

Industry Median

5.75

The company has a current ROE of 8.98% which is higher than the industry median and the ones exhibit by Koss Corp (NASDAQ:KOSS), Mad Catz Interactive Inc (MCZ), Sony (NYSE:SNE) and Jarden (NYSE:JAH).

In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1418917704972.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 33.5x, trading at a premium compared to an average of 32.5x for the industry. To use another metric, its price-to-book ratio of 3.2x indicates a premium versus the industry average of 1.67x while the price-to-sales ratio of 3.7x is above the industry average of 0.97x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $22.257, which represents a 17.4% compound annual growth rate (CAGR).

1418917684924.png

The stock is trading at a higher level than one year before, regardless of the weak earnings results.

Final comment

As outlined in the article, the stock's price rise over the last year is a bit expensive compared to its peers. So, in this opportunity I would recommend waiting until a better valuation for the firm.

Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), John Hussman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
Omar Venerio is a capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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