What Makes Garmin Tick?

Aviation and Outdoor business units look promising

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Aug 17, 2017
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Garmin (GRMN, Financial) is the world’s largest brand in the Global Positioning System (GPS) market. The company’s GPS technology delivers innovative products across several markets including aviation, marine, fitness, outdoor recreation, tracking and mobile apps.

Garmin has experienced high growth in some of its product lines while others have slowed over the recent quarters. In the most recent quarter, the company’s revenue and profits beat analyst estimates prompting a 7.5% spike in stock price as investors moved to capitalize on the management’s new guidance for the current fiscal year, but this spike was short-lived.

While Garmin remains one of the best companies in its business in terms of product quality, features and customer support, it has recently received critics alongside other wristband manufacturers with relation to privacy failings.

Late last year, reports emerged that Garmin, Fitbit (FIT, Financial), Jawbone and other “popular fitness wearable makers [had] been criticized for having obscure and asymmetrical terms and conditions that impinge on Europeans’ consumer and privacy rights.” Several third-party Garmin customer service platforms have also received similar concerns from customers as the privacy of information collected by the wrist bands continues to raise questions.

As a company that deals with confidential information collected from customers, personal privacy is a primary requirement and failing to guarantee this could be counterproductive to Garmin, Fitbit and other related companies’ sales in the foreseeable future. Garmin can still boast an advantage over its rivals because of the diversification of its product mix.

The company operates in five key business segments, and according to recent results, a couple of these make the company stand out among rivals. The aviation and outdoor divisions are behind Garmin’s most recent quarter earnings beat and according to analyst estimates, these two segments could continue to witness double-digit growth over the next few years. The company has also earmarked to boost organic growth by launching more products as it seeks to capture opportunities in the wearable devices market.

In the most recent quarter, “Garmin launched GPS golf watch – Approach S60, marine wearable – quatix 5, 360-degree camera – VIRB 360 and announced new offerings in its Foretrex and Rino portfolio.” It is also seeking growth through strategic acquisitions after acquiring Active Corp., the developer of ActiveCaptain, a crowdsourcing boating platform.

Results overview

The company’s earnings grew by 69.2% sequentially to 88 cents thereby beating FactSet’s consensus estimate of 81 cents by 7.9%.

The company also beat analyst estimates on sales of $808 million after reporting a $5.3 million increment to top last year’s figure of $811.6 million. Following the announcement of these results, Garmin management followed up the good news by adjusting upward forecasts for fiscal year 2017.

The company is now expecting full-year revenue of $3.04 billion, up from the previous guidance of $3.02 billion while the expected EPS for the year was increased to $2.80, up from the previous guidance of $2.65 per share.

Garmin’s stock price has since stabilized following the initial spike, and while some analysts aren’t convinced by the current valuation of about $51 per share, others seem to believe it could rally further. Some have come up with a price target of $60 per share citing Marine, Aviation and Outdoor as the main drivers of this growth.

Revenue from the company’s Aviation segment was up 14.5% year over year while the Outdoor segment reported an increment of 46.3% over the same period. The two represent a share of about 39% in the company’s revenue mix (Outdoor 24% and Aviation 15%) while the Marine segment that represents 13% grew by 2.7% year over year.

On the other hand, Auto/Mobile and Fitness segments posted annual declines of 15.2% and 15%, and both represent a combined total of 48% in the revenue mix according to estimates compiled by Zacks. Nonetheless, these two segments posted significant growths sequentially which could suggest that they could recoup some of the declines witnessed in the first and second quarters before the end of the year.

Conclusion

In summary, Garmin’s Aviation, Outdoor and Marine segments appear to be leading the company’s growth story while Auto/Mobile and Fitness segments are on a path to catch up. The company’s stock price has stabilized following the post-earnings spike, but analysts believe it could rally further before the end of the year.

And while Garmin seems to generally receive positive feedback on its devices, there have been a few concerns over the last few quarters with regard to its privacy policy, and this could explain why its Fitness and Auto/Mobile segments are lagging.

Disclosure: I have no position in any stock mentioned in this article.