The Post-Earnings Rally in Garmin Ltd. (GRMN) Stock Is a Head Fake

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Garmin Ltd. (NASDAQ:GRMN) stock headed higher yesterday after the company reported better than expected second-quarter results while raising its fiscal 2017 guidance. The beat-and-raise combo sent GRMN stock up about 4%.

The Post-Earnings Rally in Garmin Ltd. (GRMN) Stock Is a Head Fake

Despite the price action yesterday, I remain bearish on Garmin stock.

The Q2 report emphasized some red flags that showed up in the Q1 report. These red flags indicate that Garmin finds itself on the wrong side of some secular trends and that revenue growth today may turn into revenue declines in the foreseeable future.

I say sell GRMN stock at these levels. The Garmin earnings move is just a head-fake in an otherwise unexciting narrative and sideways stock.

The Good About Garmin’s Q2

The Outdoor and Aviation segments are popping.

Outdoor revenues rose a red-hot 46% year-over-year. That follows 20% growth last quarter, so its a rapid sequential acceleration in growth. It also laps 23% growth in the same quarter last year, so growth on a 2-year basis is north of 60%.

The big driver of out-sized growth in the Outdoor segment is Garmin’s fenix 5 smartwatch. Garmin is a market leader in outdoor connected devices. As the Internet of Things continues to expand and advanced wearables come into fashion, GRMN will continue to benefit from being a leader in a secular growth space. That is why GRMN management upped their guidance for this segment, calling for growth of 25% this year (versus 10% prior).

On the Aviation side, strong aftermarket sales and positive contributions from OEM product categories led to a 15% year-over-year growth in revenues in Q2. For the last several quarters, Aviation revenues have grown at a mid-teens rate. This trend will slow but not by much. Management sees Aviation revenues rising 10% this year.

Gross margins across the whole business are growing. Gross margins rose 150 basis points in the quarter to 58.5%. That continues what has been a multi-quarter narrative of gross margin expansion for GRMN. Operating margins also expanded 20 basis points in the quarter.

Overall, the robust revenue growth in the Outdoor and Aviation segments coupled with a positive gross margin narrative led management to up its full-year earnings guide to $2.80 versus $2.65 prior.

But that is where the good ends.

The Bad About Garmin’s Q2

The company’s biggest segment, Auto, continues to fall apart at a rapid rate.

The contraction of the personal navigation devices (PND) market is really killing Garmin. Demand for PNDs has just withered away recently. Auto sales, which represented about a fourth of Garmin’s net sales in the second quarter, fell 15% year-over-year. They fell 19% last quarter, 17% the quarter before that, and 21% the quarter before that.

The bleeding just won’t stop. The auto segment generated sales of $1.06 billion in 2015. This year, the segment is on track for sales somewhere around $700 million.

That is a massive $300 million hole GRMN must fill in order to keep revenue growth simply flat.

Right now, the company is doing that. Robust growth in the Outdoor and Aviation segments is offsetting declines in the Auto segment. But how long can that last?

Not long, and there are signs that GRMN’s revenue growth will actually slip into negative territory soon.

Total revenue growth was 10% just two quarters ago. Now its merely 1%. Yes, the Outdoor and Aviation segments are booming, but the company’s other growth segments (Fitness and Marine) have dived into negative growth territory.

Whats up with that?

Well, on the Fitness side of things, Garmin now finds itself on the wrong side of a secular shift from activity trackers to more advanced wearables. Garmin was formerly on the right side of this trend when the market was just it and Fitbit Inc (NYSE:FIT). But now the wearables market includes the likes of Apple Inc. (NASDAQ:AAPL), Samsung Electronics (OTCMKTS:SSNLF), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Fossil Group Inc (NASDAQ:FOSL).

In other words, bigger, more competent, and more experienced players have entered the smartwatch space. That will inevitably squeeze out smaller, less competent, and less experienced players, like Garmin.

Without growth in Fitness, GRMN stock will have a tough time offsetting declines in Auto. If the Marine segment continues to contract as well, the company will very likely see negative revenue growth some time soon.

The Bottom Line on GRMN Stock

Earnings-per-share this year are expected to come in around $2.80. GRMN stock trades around $52.22.

That means GRMN stock is trading at around 18.5-times this year’s projected earnings. But muted revenue growth coupled with decent margin expansion means that earnings growth is pegged at just 4% per year over the next 5 years.

A 18.5-times multiple is an absurd premium for 4% growth, especially considering the fundamental risks to Garmin’s growth narrative.

That is why GRMN stock remains a sell, even with the boosted fiscal 2017 guidance.

As of this writing, Luke Lango was long FOSL.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/garmin-ltd-grmn-stock-head-fake/.

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