Your Road Navigator Has Juicy Dividend Yields
- By Mark Yu
Garmin (GRMN), the $9.7 billion Switzerland-based scientific and technical instruments company, reported 1.4% year-over-year revenue growth to $1.46 billion and a very impressive 64% profit growth to $408.8 million in the first half of the year, resulting in a 28% margin compared to 17% in the same period last year.
Garmin registered 6.4% total operating expenses increase in the same period but recorded a $22.4 million foreign currency loss compared to $10.6 million a year earlier. Nonetheless, Garmin recognized an income tax benefit of $93 million which helped facilitate its profit increase in the period.
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In addition, Garmin raised its fiscal year 2017 guidance. Among others that were increased, the company expects its revenue to be ~$3.04 billion (vs. $3.02 billion in 2016) and pro forma earnings per share (EPS) ~$2.8 (vs. $2.83 in 2016).
"We delivered another quarter of revenue and earnings growth led by strong double-digit growth in our outdoor and aviation segments.
"The demand for advanced wearables was particularly strong but was partially offset by negative trends in the activity tracker market. Our results thus far give us confidence in raising our outlook for the remainder of the year." - Cliff Pemble, president and CEO of Garmin Ltd.
Valuations
Garmin is undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio 14.47 times vs. the industry median of 21.7 times, a price-book (P/B) ratio of 2.8 times vs. 1.7 times and a price-sales (P/S) ratio of 3.2 times vs. 1.14 times.
The company had a trailing dividend yield 3.95% with a 57% payout ratio.
Average 2017 revenue and EPS estimates indicated forward multiples of 3.4 times and 18.4 times.
Total returns
Garmin underperformed the broader Standard & Poor's 500 index so far this year with total returns of 8.1% compared to the index's 11.5%.
Garmin
According to filings, Garmin was incorporated in Switzerland in February 2010 as successor to Garmin Ltd., a Cayman Islands company. Garmin Cayman was incorporated on July 24, 2000 as a holding company for Garmin Corp., a Taiwan corporation, in order to facilitate a public offering of Garmin Cayman shares in the U.S.
For over 25 years, Garmin and subsidiaries have pioneered new Global Positioning System (GPS) navigation and wireless devices and applications that are designed for people who live an active lifestyle.
The company believes it is through these business units that Garmin is able to achieve synergies in raw material purchases, manufacturing, distribution, research and development and marketing efforts making for a stronger, more effective company.
Garmin designs, develops, manufactures, markets and distributes a diverse family of hand-held, wearable, portable and fixed-mount GPS-enabled products and other navigation, communications, sensor-based and information products.
In 2016, 50% of Garmin's revenue was generated in the Americas, 36.9% in EMEA and the remaining in APAC.
Garmin serves five primary business units, including auto, aviation, fitness, marine and outdoor.
Auto
In the first half, revenue in the auto segment fell (-)17% year over year to $366 million (25% of sales; largest) with operating margin of 9.5% compared with 13.2% a year earlier.
According to filings, Garmin's auto sales fell primarily because of Personal Navigation Device market contraction. Personal Navigation Devices is a full featured GPS navigator with built-in maps with Garmin's uniquely simple user interface.
Aviation
In the first half, aviation revenue grew 15% year over year to $246.9 million (17% of sales) and margins of 31.6% compared to 28.6% in the year prior. Sales grew primarily due to growth in aftermarket sales.
Marine
In the first half, marine revenue grew 9.5% to $213 million (15% of sales) and margins of 20% - similar to prior-year period profitability.
Outdoor
The outdoor business' revenue climbed 35% year over year to $310.65 million (21% of sales) in the first half, and it had margins of 35% compared to 33.3% in the year prior.
Fitness
In the first half, revenue in the fitness business declined (-)10% to $318.9 million (22% of sales) and had margins of 17.6% compared to 19.6% a year earlier.
According to filings, this revenue reduction was driven by the general decline of the basic activity tracker market and the timing of product introductions.
Sales and profits
In the past three years, Garmin registered revenue growth average of 4.68%, profit decline average (-)5.87% and profit margin average 15.26%.
Cash, debt and book value
As of July, Garmin had $859.6 million in cash and cash equivalents and $0 debt. Meanwhile, overall equity increased $265.6 million year over year.
Of Garmin's $4.75 billion assets 6.5% were intangibles while book value rose 8.3% year over year to $3.48 billion.
Cash flow
In the first half, Garmin's cash flow from operations declined by (-)5.6% year over year to $263.8 million brought by higher cash outflow in its deferred income taxes, inventories, other current and noncurrent liabilities and deferred costs.
Capital expenditures were $46.1 million leaving Garmin with $217.7 million in free cash flow compared with $247.9 million in the year prior period. The company maintained its debt-free status while provided 1.2 times its free cash flow in dividend payouts.
The cash flow summary
In the past three years, Garmin allocated $259 million in capital expenditures, raised $57 million in share issuances, generated $1.25 billion in free cash flow and provided $1.72 billion in dividends and share repurchases with free cash flow payout ratio average of 166%.
Conclusion
Garmin's first-half operations indicated steady business growth but less clarity in profit generation brought by its bigger losses in relation to foreign currency and higher tax benefits brought by revaluation of its deferred tax assets.
Meanwhile, average analysts expectations indicate similarity in Garmin's anticipated 2017 revenue and EPS guidance indicating less susceptibility to further readjustments.
A closer look, though, indicated that Garmin's largest revenue generator - Auto - is still experiencing ongoing business decline. It was once 44% of all sales (fiscal year 2014) and now comprises less than 30% (fiscal year 2016). Another, line of business - Fitness (22% of sales in the first half) - experienced a decline in business corresponding to timing of product introductions.
In addition to the declining auto business, fitness should be closely followed since it also has slowly exhibited declining margins over time albeit still in high teens (17.6% in the first half vs. 19.6% in first-half 2016).
Nonetheless, Garmin's other businesses showed steady and strong growth and profitability. Lacking any debt, the company has a solid balance sheet state while having generously rewarded its shareholders in recent years in terms of its free cash flow payout ratio.
Average analysts have a hold recommendation with average price target of $52.63 vs. $51.41 at the time of writing. Using average revenue estimates multiplied with three-year a P/S average with 10% margin indicated a per share figure of $42.31.
In summary, Garmin is a safe hold.
Disclosure: I do not have shares in any of the companies mentioned.
This article first appeared on GuruFocus.
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