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Garmin Ltd (GRMN)

One of the favourite investment principles of the legendary hedge fund manager and American investor Peter Lynch was to “invest in what you know”. His theory was that beginner investors could be just as, if not more, successful at picking stocks than Wall Street by being able to spot good investments in going about their everyday lives.

His most famous example was when he purchased shares in Dunkin’ Donuts. Not after reading about the company in the Wall Street Journal, but instead, really liking their coffee as a customer. He figured if he enjoyed it so much, then everyone else would too. A quick look at the financials showed he was onto a good thing, and the investment eventually turned out to be one of his best ever.

I feel the same way about today’s stock report subject Garmin. I certainly wasn’t the first to notice the company. It had been around for a decade or so before I started using their products. But I was certainly one of the early adopters of their wearable technology, owning (and loving) a forerunner 301 wristwatch when they first came out in 2003. To be honest, compared to today’s flash models the thing was like strapping a small brick to your arm. But I used it and loved it and I’m still using their (technologically improved) wearables products today. In fact, I’m probably ready for a new upgrade now that I think about it.

Garmin started making GPS devices for use in marine vessels. Their first customer was the US army who then recruited them to make a handheld GPS device that soldiers could use to maintain their bearings. Such devices are still a main part of their business today. However, they have also become a major player in the consumer retail market with car devices, fitness trackers and sports watches, fish finders, laptop and mobile GPS applications, and products for an extremely successful avionics sector.

Their products continue to innovate and stay ahead of the competition. They invest a large portion of their cash on hand in research and development and continually set the standard for new products. It’s a business that you need to stay in front of. Take their GPS car devices that just five years ago accounted for nearly one-third of their business. They were the most popular brand on the market, yet the introduction and high uptake of the smartphone left their products all but redundant. However, they have continued to increase revenue and profits by finding new markets and expanding their product base.

The pandemic certainly hasn’t hurt their business. The last year has seen a resurgence of people seeking all different types of outdoor exercise. I guess it’s a byproduct of being stuck indoors. We have become more health-conscious, and more populations are moving away from the city and into the suburbs and rural areas. CEO Cliff Pemble reported in a press release that “interest in fitness, health, and active lifestyle products has never been higher”. It also nicely coincided with some well-timed product launches to take advantage of the trend. Whether it be running, cycling, fishing, golfing, or mountain climbing. Garmin has a specialised device just for that consumer. Its fitness segment now accounts for 31% of total sales.

Its Q1 earnings report highlighted its recent success. Expected earnings per share of $0.88 came in at an impressive $1.18, giving it four quarters in a row of earnings beats. Revenue hit $1.07 billion when the market was expecting only $924 million. It saw double-digit growth right across the board in its fitness, outdoor, marine, and auto segments. Interestingly they kept guidance for the rest of 2021 at the same levels as the last earnings report, and I can only imagine it will be an easy beat again when its current quarter figures are announced in a few months time.

Sales are up, profitability is up, and margins are continually improving. R&D was up by 6.7% in 2019, and then by 16.25% in 2020. They can do this because they have no debt and sit on nearly $3 billion in cash and securities. That’s more than 10% of its market cap. In my opinion, they will continue to innovate and create products that consumers want to buy. And they’ll make plenty of money doing it. You can buy Garmin today for pretty much the same price that you could a year ago. It’s spent twelve months treading water but there’s every chance it’s about to make its next move higher.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.
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