Back in February, Garmin Ltd. (NASDAQ:GRMN) shares were pushing toward new 52-weeks highs on a stellar fourth-quarter earnings report. Management hammered expectations in each quarter of fiscal 2016, while growing revenues at a respectable rate. Margins were expanding and business was good. But GRMN stock isn’t trading like that anymore.
In fact, at $50, GRMN stock sits pretty squarely between its 52-week range of $46 and $56. Investors want to know which end of the range it may test on Garmin earnings Wednesday morning.
Last quarter (fiscal 2017 first quarter) had its positives. Double-digit revenues growth in marine, outdoor and aviation were seen. Gross margins grew by 380 basis points to 58.3% and operating income grew by 12% year-over-year. However, weakness in the fitness market (revenues down 2%) and auto (down a whopping 19%) made for overall sales to grow just 2% in the quarter.
After handedly beating earnings and revenue estimates in 2016, this year does not offer the same growth. Analysts expect sales to contract 20 basis points in 2017 and grow just 1.1% in 2018. On the earnings front, forecasts call for a 5.2% decline in 2017 and just 2.2% growth in 2018.
GRMN Stock: Here’s My Number, Call Me Maybe…
Or when it comes to GRMN stock, call me never. The Swiss maker of GPS products, fitness trackers and infotainment systems is a good company. But right now there are too many issues for me to get on board with.
For starters, when consumers think fitness trackers, many think Fitbit Inc (NYSE:FIT). Given that FIT stock is down 85% in two years, there may be a good argument against that thesis. However, it could also serve as a warning sign for a tough industry. Garmin saw fitness revenues contract slightly last quarter. That’s not a reason to dump the stock necessarily.
But operating in a competitive environment this thick is kind of a turnoff. Especially when we realize that Apple Inc. (NASDAQ:AAPL) is also there with its Apple Watch.
Note, this is specifically with its fitness division. Garmin’s wearables business, which consists of high-end GPS/watch units has done quite well.
Additionally, in May Garmin introduced the Virb 360, a 360-degree camera that can now compete with GoPro Inc (NASDAQ:GPRO). It comes complete with a $799.99 price tag and while I’m sure it’s high quality, I have concerns. First, how many consumers will be out looking to drop $800 on an action cam? Second, how many of those customers will be buying another 360-degree action camera after the Virb? Finally, how many consumers that are looking for one, will consider GoPro when it has its competing product on the market?
I know this is just one segment of business for Garmin. But getting into competition with Fitbit and GoPro — both of which have seen their stocks get slaughtered — isn’t really what I want to see.
With that said, when people think GPS, they think Garmin. That’s where its aviation, marine and personal trackers/wearables come in handy.
Evaluating Garmin Stock
I don’t want to dislike Garmin. I just need some other catalysts in order to get on board. Essentially flat earnings and sales growth is not a good reason. Nor is its trailing price-to-earnings ratio of 14 and forward P/E reading of 18. I can pay those valuations for far higher-earning companies.
Garmin does have a dividend yield north of 4%. For patient investors, they can collect the dividend and wait for a return to growth. Listening to what Boeing Co (NYSE:BA) has said for years now, we know the aviation and aerospace market remains robust. That bodes well for Garmin’s aviation business, where revenue grew 16% last quarter. That goes alongside the 26% sales growth in its marine division.
So there are definitely positives to the story. Perhaps if 2018 earnings and revenues were growing, Garmin would be a stock to buy.
Getting into a bit of speculation, say Garmin found a way into the autonomous driving world in a more meaningful way. That would certainly be a way to boost its auto revenues. It would also excite investors, perhaps convincing them to pay a higher multiple for the stock.
GRMN, a $9.4 billion company, has over $1 billion in cash and short-term investments to go along with zero debt. Perhaps some type of deal or acquisition would be enough to give it the earnings and sales boost it needs.
The Bottom Line on GRMN Stock
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Garmin is a good, but not great company right now. Unlike Pfizer Inc. (NYSE:PFE), which we deemed a good, but not great company, we found that its stock and big dividend could be bought ahead of earnings.
$50 has been decent support for Garmin stock over the past year, as has the 200-day moving average. While this could prove to support it once again, GRMN stock seems like a limited-reward stock that may be overvalued with little to no growth over the next 20 months. I’ll take a pass for now.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.
