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Robert Stephens, CFA
Robert Stephens, CFA
Articles (230) 

Garmin’s Innovative Approach Could Deliver High Returns

The company’s strategy looks set to catalyze its financial performance

October 09, 2018 | About:

Garmin (NASDAQ:GRMN)'s focus on innovation could create an increasingly dominant business. It has the potential to capitalize on growth within the wearables segment through its position as a niche operator, rather than seeking to compete with major rivals in the general smartwatch segment.

The addition of new features to its products has the potential to boost its performance in wearables, as well as in other areas such as aviation. A deal with Disney (NYSE:DIS) could also catalyze sales among a younger demographic of smartwatch customers.

The company’s stock price has risen 26% in the last year versus a gain of 14% for the S&P 500. With a sound strategy, further outperformance of the index may be ahead.

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Aviation

Garmin’s aviation segment could be boosted by its recent acquisition of Flight Plan, which offers flight plan and trip support services through a website and mobile app, with 165,000 registered users across the Americas. It is used to create over 6 million flight plans per year, and it could offer complementary services that can be easily integrated into the company’s wider aviation division.

Growth within the aviation division may also be catalyzed by sales of its ADS-B products. Demand has been boosted by the FAA’s decision that all aircraft wishing to fly in Class A, B or C airspace needs to install the equipment. With the ADS-B market being around halfway through the cycle according to company estimates, there may be further growth – especially since shop capacity is seeing only a modest increase. The company’s performance may also be improved by the release of its G3000H integrated flight deck for the Part 27 turbine helicopter market, as well as the decision by Tactical Air Support to utilize the company’s integrated flight deck in its F-5 fighter aircraft.

Innovation

The deal with Disney to produce Princess-themed bands for the vivofit jr. 2 product line could provide added incentive for customers to purchase the company’s products. It works alongside a mobile app and allows children to play alongside their favorite Disney characters as part of a more active lifestyle. With the potential to switch the accessory band that attaches to the tracker, it could prove to be a product with greater longevity than some of its rivals.

The company is aiming to focus on greater innovation within its product lines as it seeks to gain a competitive advantage versus its peers. For example, it has targeted the cycling safety market through the next generation Varia radars. Meanwhile, a sonar system which generates real-time images underwater, Panoptix LiveScope, also has the potential to create an increasingly dominant position in the marine segment.

Niche products

The worldwide market for wearable products is expected to grow 15% in 2018. It is forecast to deliver a compound annual growth rate of over 13% in the next five years, with almost 220 million units set to be sold in 2022. Within the wearables segment, smartwatches are forecast to enjoy the highest average selling prices. They are expected to be responsible for 40% of the market value of the wearables industry, with Apple (AAPL) due to be the biggest winner due to its dominance of the market. It currently sells over half of all smartwatches, and its dominance may increase as consumers seek higher-end products.

Although this may squeeze competitors over the medium term, Garmin’s focus on niche products could allow it to capitalize on the growth potential of the wearables industry. It is adding increased functionality to its devices, and remains a clear choice for consumers taking part in more focused activities such as underwater diving or running.

For example, the Descent dive watch combines data such as dive time and water temperature with the ability to utilize email and text functionality while underwater. Similarly, the Forerunner 645M watch stores up to 500 songs and utilises contactless payment services, while also offering a suite of fitness capabilities. A focus on niche products may allow the company to avoid direct competition with Apple, since it will largely shun mass-market opportunities in favor of more focused products.

Outlook

Garmin’s focus on innovation has the potential to create a growing competitive advantage. Its aviation segment could be boosted by its acquisition of Flight Plan, while sales of its ADS-B products are set to remain high since the market is around halfway through its cycle. Similarly, its deal with Disney could create additional demand for its smartwatches, while a focus on new product features across its various divisions could strengthen its competitive position versus peers.

Although Apple is set to become an increasingly dominant force within the wearables industry, Garmin’s focus on niche products could allow it to capitalize on the forecast growth rate of the industry. After outperforming the S&P 500 in the last year, the stock seems to have investment appeal.


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