By Kris Rosemann
Little has changed at Garmin (GRMN) as of late from an operational standpoint.
The lion’s share of the pressures weighing on the company’s shares are external forces, in our opinion. The firm is executing soundly, and recent product launches were key drivers of improved results through the first half of 2016 and gave management the confidence to raise its top- and bottom-line guidance for full-year 2016. Free cash flow generation has rebounded nicely thus far in 2016 as well.
Through the first six months of the year, the company reported free cash flow of more than $250 million, compared to free cash flow generation of -$55 million (negative $55 million) in the comparable period of 2015. Garmin returning to its historical levels of strong free cash flow is a great sign for its balance sheet, which remains cash rich. Cash, cash equivalents, and marketable securities totaled nearly $2.4 billion as of June 30, 2016 compared to no debt held on the books.
However, we cannot ignore the competitive pressures that have the potential to impact the firm moving forward. New product launches from Fitbit (FIT) and Apple (AAPL) in the wearable technology market have the potential to weigh on Garmin’s market share and pricing power (and therefore operating margins). Weakness in the personal navigation device market continues to weigh on the firm’s ‘Auto’ segment, and we expect mobile devices now being equipped with GPS to provide ongoing support for such a trend.
There may be a silver lining in the decline of Garmin’s auto business, which is the largest of its segments in terms of revenue but has the lowest operating margin. The secular trend away from personal navigation devices presents an organic opportunity for the firm to adjust the tilt of its portfolio towards its higher-margin businesses. We’re expecting margin expansion moving forward. As we know, however, every silver lining has a touch of grey, and falling demand in a company’s largest segment is clearly not welcome news.
All things considered, Garmin presents an interesting investment case. We love its dividend growth profile, the basis of which is its impressive balance sheet and history of strong free cash flow generation. Its Dividend Cushion ratio currently sits at a healthy 1.8 and its yield is a very competitive ~4%. However, shares have run up near the upper bound of our updated fair value range of $34-$52, and its valuation also appears full based on its current-year P/E ratio of more than 20.
Garmin was likely a beneficiary of the desperate search for yield we have seen take over the markets as the Treasury yield remains suppressed. Such a dynamic may be beginning to change, as Fed Chair Janet Yellen’s comments August 26 indicated openness to rate hikes sooner rather than later. The weakness in shares this past week may very well have been an instance of investors locking in some profits after receiving less than spectacular news. After all, shares were up nearly 47% year-to-date as of August 23.
We think our fair value estimate in the low-$40s range is appropriate, and it includes assumptions of low-single-digit revenue growth coupled with operating margin expansion as we expect higher-margin businesses such as ‘Outdoor’ and ‘Fitness’ to continue to proliferate. The firm’s technicals have not given us cause for concern at this point in time, but we will continue to watch shares, especially in light of the recent sell off.
————————-
Aug 15, 2016
The Strongest Dividend Payers Yielding Over 2%
We multiply each firm’s dividend yield by its Dividend Cushion ratio to get this coveted list of the strongest dividend payers yielding over 2%.