What Garmin Ltd. (NASDAQ:GRMN) has done over the past few years is truly impressive, even if the performance of Garmin stock doesn’t appear to reflect it. If you go back to fiscal 2010, for instance, 62% of revenue came from the company’s Auto/Mobile (as it terms it) segment. That’s the automotive GPS business for which the company remains best known.
That was about to become a declining business, however, with more cars shipping with in-dash navigation, limiting the need for Garmin models. Indeed, revenue in that segment has declined 55% over the past seven years.
And yet, Garmin has managed to diversify away from that business — and keep profits intact. It’s even returning to growth, as seen in the company’s fourth-quarter results on Wednesday. That’s easier said than done. A number of single-product hardware companies — think Fitbit Inc (NYSE:FIT) or GoPro Inc (NASDAQ:GPRO) — have tried and failed at the very same strategy.
The problem for GRMN stock, however, is that even success isn’t that successful. With both the fitness and auto businesses declining, Garmin managed net sales growth of just 2% in 2017, even with a Q4 beat. Adjusted earnings per share rose 4%, with a 9% increase in Q4. The 2018 guidance projects sub-4% growth in both revenue and EPS.
Compared to the huge amount of problems at Fitbit or the tire fire that is GoPro, Garmin’s performance is impressive. But with Auto and Fitness still each accounting for about a quarter of sales, there’s still a high degree of difficulty for the company looking forward. Driving consistent, accelerated growth is going to be tough for some time to come.
Garmin Stock’s Q4 Earnings
Garmin’s Q4 numbers came in nicely ahead of expectations. Non-GAAP EPS of $0.79 was $0.03 better than consensus, and grew 9% year-over-year. Revenue rose 3.2% YOY, against Street estimates for an increase of about 1%.
Auto revenues unsurprisingly declined 14% — but the rest of the business increased sales 9%, including 24% growth in Marine and 16% in Outdoor. Operating margins expanded 160 basis points. In the numbers, an investor can see the bull case for Garmin: As the auto business shrinks, and the rest of the business grows, the drag from auto lessens.
Meanwhile, 2018 guidance beat as well. Non-GAAP EPS is targeted at $3.05, against a $2.99 consensus. Revenue of $3.2 billion is expected to grow 3.7% year-over-year, better than the 1.5% expected by the Street.
So why did Garmin stock sell off? There are two possibilities. The first is that EPS guidance might be higher than expectations –but only because of a lower tax rate. Garmin is guiding for a 19% tax rate next year, against 21.2% in 2017. Revenue and operating margin guidance actually suggests basically flat operating income growth YOY. And while the GRMN stock price isn’t particularly high, there is some growth priced in.
Garmin Stock Looks OK, Not Great
At a current price around $62, Garmin stock looks even expensive. The 2018 guidance of $3.05 suggests a forward price-earnings ratio just over 20x. That seems a high price to pay for 4% expected growth.
But Garmin also has $12 per share in cash and securities. Backing that out, the multiple drops to a more reasonable 16x.
Is that worth paying? It seems a tough bull case from here — 16x is cheap, and a likely raised dividend (subject to shareholder approval) provides a nice 3.4% yield. But the hardware space is particularly tough, with so much of the capabilities offered separately steadily moving toward software. And growth remains rather muted — with what should be reasonably strong macro trends behind Garmin.
Again, what Garmin has done in diversifying away from auto is particularly impressive. But it’s not as if GRMN stock has been some torrid grower. It’s risen 76% over the past five years, modestly below the S&P 500. And investors can own stocks that don’t have the steady headwinds Garmin faces. Small-cap Johnson Outdoors Inc. (NASDAQ:JOUT) offers similar marine/outdoor exposure without auto declines. And large-cap boat manufacturer Brunswick Corporation (NYSE:BC) looks attractive at current levels as well.
Unless Garmin really can turn the Fitness segment around — and 2018 guidance is for flat sales in that category — it’s tough to see growth accelerating. And without growth accelerating, the GRMN stock price is unlikely to move all that much.
As of this writing, Vince Martin has no position in any securities mentioned.