Wednesday, 23 September 2015

Garmin by Segment Analysis

This is a quick follow up post to my last post on Garmin.  This is not a buy/sell solicitation in any shape way or form.  This is purely for educational purposes.

In my last post, I asked the hypothetical question, if I were to ascribe a value of zero to the contribution from Auto GPS devices, what would the theoretical margin of safety be for the remaining segments if price retested the 2009 low of $17.50?

I began by taking the last 5 years of segment disclosures from the 10K's, and I attempted to determine the value of EV/EBIT and EV/EBITDA based on current market price if the segements were valued seperately.

I had to make an assumption regarding how to derive depreciation by segment in order to get from Segment operating income (assuming this is EBIT) to EBITDA.  Simply put, I took total depreciation + amortization from the cash flow statements each year, and I allocated it pro-rata on a % of revenue basis to each segment between 2011 & 2015.

I also had to make an assumption regarding 2015 total Revenue and EBIT.  Thus far, the company has only reported 26 weeks, and I don't think a straight linear annualization is the correct assumption for each segment.  From the 2014 10K, I would hazard a guess that Fitness and Outdoor device sales tend to be greater in the summer, and perhaps there's a spike in these segment sales towards xmas.  Marine is probably seasonal with a summer skew.  Auto as we all know, has fallen off a cliff, so I basically doubled the 26 weeks thus far.  I did the same for aviation.

For fiscal 2015, the company has guided $2.9B in total revenue.  I've come in at $2.7B assuming no growth in Fitness and Aviation, so I think I'm erring on the side of caution here.

Here's the analysis using the last 5 years of EBIT (from which I derived EBITDA):

20112012201320142015
GRMN by segment analysisEBITEBITEBITEBITEBITEBIT multipleWeighted Avg EBIT multipleValueCAGR
Outdoor1621651591511238.821.771,081-6.68%
Fitness10211212019119112.603.932,40316.90%
Marine583418265711.341.06646-0.29%
Auto1612211892161357.561.661,018-4.33%
Aviation72738810710712.602.211,35110.61%
Total55460457469161210.626,4982.54%
Global financing0000012.6006,498
O/S194.90196.20196.30194.20191.60
PPS39.8140.7546.1652.8335.90
Mkt cap ($B's)7,7597,9959,06110,2606,87811.24
Add: Debt00000
Less: Cash-2,631-3,025-2,979-2,897-2,608
EV5,1284,9706,0827,3634,2706.9865.72%Prem/Discount vs. EV
EBITDAEBITDAEBITDAEBITDAEBITDAEBITDA multipleWeighted Avg EBITDA multipleValueCAGR
Outdoor1741781711621337.001.35931-6.50%
Fitness11212313120620610.003.002,05916.36%
Marine65412533669.000.875980.45%
Auto2152702272491646.001.43982-6.63%
Aviation81839811711810.001.721,1849.85%
Total6486946537686878.375,7541.48%
Global financing0000010.000.0005,754
EV5,1284,9706,0827,3634,2706.2174.21%Prem/Discount vs. EV
EV / EBITDA7.917.169.329.596.21


I've borrowed from Professor Aswath Damodaran's published multiples by segment in order to model these theoretical multiples.

http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/vebitda.html

The key segments here are Fitness and Aviation, which have shown strong growth over the last 5 years on an EBIT and EBITDA basis.  On this basis, I've ascribed a theoretical 10x EBITDA multiple (equivalent to computer peripherals).  For outdoor I've used 7 x EBITDA.  For Marine, I've used 9 x EBITDA.  For auto, I used 6 x EBITDA (about the lowest multiple from Professor Damadoran's list).

Using both an EV/EBITDA and EV/EBIT approach, the individual segments (the parts) appear to carry a greater valuation than the whole.

2009 low redux

Next, assume Auto device sales continue to deteriorate, and somehow, in combination with overall market weakness, Garmin revisits it's 2009 low at $17.50.  Here's the analysis again entirely excluding the Auto segment EBITDA and EBIT, using an EV of just under $1B:

20112012201320142015
GRMN by segment analysisEBITEBITEBITEBITEBITEBIT multipleWeighted Avg EBIT multipleValueCAGR
Outdoor1621651591511238.822.261,081-6.68%
Fitness10211212019119112.605.032,40316.90%
Marine583418265711.341.35646-0.29%
Auto16122118921607.560.000-100.00%
Aviation72738810710712.602.831,35110.61%
Total55460457469147711.485,480-3.64%
Global financing0000012.6005,480
O/S194.90196.20196.30194.20191.60
PPS39.8140.7546.1652.8317.50
Mkt cap ($B's)7,7597,9959,06110,2603,3537.03
Add: Debt00000
Less: Cash-2,631-3,025-2,979-2,897-2,608
EV5,1284,9706,0827,3637451.5613.60%Prem/Discount vs. EV
EBITDAEBITDAEBITDAEBITDAEBITDAEBITDA multipleWeighted Avg EBITDA multipleValueCAGR
Outdoor1741781711621337.001.78931-6.50%
Fitness11212313120620610.003.932,05916.36%
Marine65412533669.001.145980.45%
Auto21527022724906.000.000-100.00%
Aviation81839811711810.002.261,1849.85%
Total6486946537685249.114,772-5.19%
Global financing0000010.000.0004,772
EV5,1284,9706,0827,3637451.4215.61%Prem/Discount vs. EV
EV / EBITDA7.917.169.329.591.42


Ok, I've arbitrarily manipulated my way through a sensitivity analysis in order to determine a risk range.  At current Auto Segment EBIT and EBITDA, there could be a theoretical margin of safety.  If price continues dropping and I simply exclude the Auto Segment, I get an even greater theoretical margin of safety. Is this analysis enough?

I think an analysis has to be made relative to a) expectations, b) comparable products and c) competitor valuations.

The first thing to note is that Garmin has been warning about Auto Segment performance for some time.  The expectation of continued dismal performance in Auto's is in the market.  This risk is spelled out front and centre in the 10K under business risks.

There has been some analysis surrounding Garmin attempting to transform it's Auto GPS business in order to take advantage of the internet of things.  Per the Globe and Mail:

http://www.theglobeandmail.com/globe-investor/gadget-maker-garmin-finds-its-bearings/article24927052/

My thoughts are that the bar has already been set so low, that any hint of stabilization, or a less severe decline in Auto device sales than already expected,"could" result in an improvement in sentiment.

Next, I note that relative to comparable products in the Fitness segment, Garmin appears to be growing in terms of units shipped in Q1 2015, but at the expense of market share.  Market share slipped vs. Q1 2014, but shipment volumes increased by 133% (on par with Fitbit). 

See attached from IDC:



Top Five Wearables Vendors, Shipments, Market Share and Year-Over-Year Growth, Q1 2015 Data (Units in Millions) 
Vendor
1Q15 Shipment Volumes
1Q15 Market Share
1Q14 Shipment Volumes
1Q14 Market Share
Year-over-year Change
1. Fitbit
3.9
34.2%
1.7
44.7%
129.4%
2. Xiaomi
2.8
24.6%
0
0.0%
N/A
3. Garmin
0.7
6.1%
0.3
7.9%
133.3%
4. Samsung
0.6
5.3%
0.3
7.9%
100.0%
5. Jawbone
0.5
4.4%
0.2
5.3%
150.0%
Others
2.9
25.4%
1.3
34.2%
123.1%
Total
11.4
100.0%
3.8
100.0%
200.0%
  

Here's the revenue and gross margin by Segment through the 26 weeks ended June 27, 2015 (I estimated annual 2015 revenue by using reported #'s for the six months ended June 27, 2015).

One thing to note is that margins in Fitness seem to have slipped vs. 2014.  This could be symptomatic of management being aggressive on pricing in order to compete, or it could be symptomatic of currency movement vs. the USD.  Revenue has basically almost doubled since 2011 in Fitness.

Interestingly enough, Auto margins have stayed fairly constant despite declining revenue.

Aviation shows the strongest margins of all the segments.


(26 weeks)
Revenue20112012201320142015
Outdoor363402411428372
Fitness298322356568568
Marine222208223248336
Auto1,5901,4921,3021,2401,030
Aviation284292339386401
2,7572,7152,6312,8702,707
Gross Margin20112012201320142015
Outdoor66%65%64%62%63%
Fitness61%64%63%63%59%
Marine58%60%52%52%56%
Auto38%43%43%46%46%
Aviation67%70%73%71%73%
%20112012201320142015
Outdoor13.17%14.80%15.62%14.89%13.76%
Fitness10.81%11.85%13.54%19.80%20.99%
Marine8.04%7.66%8.47%8.65%12.41%
Auto57.67%54.95%49.48%43.20%38.04%
Aviation10.30%10.74%12.89%13.45%14.80%


Finally, a valuation comparison:

I can't help but pick on Fitbit.  When I see 17 analysts clustering together, I can't help but think that if they're all trying to forecast the same  metric, there's "minimal chance" (wink wink) that they'll miss the mark, and if they do miss the mark, there's safety in them all missing the mark together!



"16 analysts""17 analysts"

(Per Yahoo(Per Yahoo
FITFinance)Finance)

20122013201420152016CAGR
Revenue76.40271.10745.401,680.002,230.00132.44%
Cost of sales49.70210.80387.80873.601,159.60119.78%
Gross profit26.7060.30357.60806.401,070.40151.63%
Gross margn34.95%22.24%47.97%48.00%48.00%8.26%
EBITDA-2.6-5.9164.1299.3397.29
EV0.00.00.08,110.08,110.0
EV/EBITDA00027.1020.41

"18 analysts"
My estimate(Per Yahoo
GRMNFinance - Low estimate)
20122013201420152016CAGR
Revenue2,715.062,631.402,870.102,707.502,800.000.77%
Cost of sales1,277.001,225.001,266.001,276.001,319.590.82%
Gross profit1,438.061,406.401,604.101,431.501,480.410.73%
Gross margn52.97%53.45%55.89%52.87%52.87%-0.04%
EBITDA679.0715.0653.0768.0794.24
EV4,970.26,082.27,362.64,281.94,281.9
EV/EBITDA7.328.5111.285.585.39


Here's the consensus distribution of recommendations for Garmin, courtesy of the Financial Times:

Consensus recommendation

As of Sep 18, 2015, the consensus forecast amongst 20 polled investment analysts covering Garmin Ltd. advises investors to hold their position in the company. This has been the consensus forecast since the sentiment of investment analysts deteriorated on Feb 20, 2015. The previous consensus forecast advised that Garmin Ltd. would outperform the market.
Previous recommendations
Last year3 months ago2 months ago4 weeks agoLatest
Mouseover chart recommendation details.
Latest recommendation
Buy2
Outperform3
Hold12
Underperform1
Sell2
No opinion0




























Here's the consensus distribution of recommendations for Fitbit:

Consensus recommendation

As of Sep 21, 2015, the consensus forecast amongst 17 polled investment analysts covering Fitbit Inc advises that the company will outperform the market. This has been the consensus forecast since the sentiment of investment analysts deteriorated on Jul 13, 2015. The previous consensus forecast advised investors to purchase equity in Fitbit Inc.
Previous recommendations
Last year3 months ago2 months ago4 weeks agoLatest
Mouseover chart recommendation details.
Latest recommendation
Buy4
Outperform6
Hold7
Underperform0
Sell0
No opinion0


No comments:

Post a Comment