Friday, 18 September 2015

Garmin, Value Stock or Cigar Butt?

This will be a very quick cursory analysis.  Garmin has been under pressure for some time.

It’s a research in motion type story.  They made lots of money pioneering the portable automotive GPS device, and then all the auto companies started embedding their own GPS systems into their new cars and Garmin’s auto GPS device sales fell off a cliff.  So here’s what I did.

I did a 10 year EPV using historical data from gurufocus inclusive of GPS auto devices up til 2014.  For 2015, I used the 10Q disclosures on operating income by segment excluding 100% of GPS auto devices. 

This means I valued the contribution in terms of auto GPS devices at ZERO.  I did this out of curiosity to see if the remaining segments (which seem to be profitable and growing) provide a theoretical margin of safety at today’s price of $36 per share.

Before I show you the results, another quick comment.  They have about $1.2B of net cash after deducting total liabilities.  This works out to about $6 per share.  Remember, I’ve excluded sales of $1B, and EBIT of about $130M here related to the auto segment.  This analysis is for the remaining segments only.

Drumroll please…


12/31/200512/31/200612/31/200712/31/200812/31/200912/31/201012/31/201112/31/201212/31/201312/31/201412/31/2015
Sales1,0281,7743,1803,4942,9462,6902,7592,7162,6322,8711,6885.08%
EBIT3385559078627866375546045746914222.24%
EBIT %32.88%31.29%28.52%24.67%26.68%23.68%20.08%22.24%21.81%24.07%25.00%23.37%
Avg EBIT0000000000422
Add special charges00000000000
EBIT before special charges3385559078627866375546045746914222.24%
Special charges as % of sales0.00%0.00%0.00%0.00%0.00%0.00%0.00%0.00%0.00%0.00%0.00%0.00%
Deduct avg special charges00000000000
EBIT after avg special charges3385559078627866375546045746914222.24%
SG&A122215396485420432486509468519334
SG&A as % of sales11.87%12.12%12.45%13.88%14.26%16.06%17.62%18.74%17.78%18.08%19.79%15.70%
R&D75113159206238277299326365395267
R&D as % of sales7.30%6.37%5.00%5.90%8.08%10.30%10.84%12.00%13.87%13.76%15.82%9.93%
Add back 25% of SG&A31549912110510812212711713084
Add back 25% of R&D1928405260697582919967
Adjusted EBIT3876371,0461,0359518147508137829205723.98%
Tax rate20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00%
EBIT AT310510837828760651600650626736458
+ Dep'n4444647896959595907947
-FCInv-27-96-160-120-49-32-34-38-56-73-48
Adj EBIT AT327458741786807714661707660742456.59220013.40%
NI per F/S3115148557337045855215426123644102.80%
$ Diff16-56-114531031291401654837847
% Diff4.83%-12.33%-15.45%6.72%12.81%18.11%21.20%23.36%7.24%50.92%10.20%
Div's0.250.500.750.750.750.751.501.601.751.801.8922.42%
Cost of capital rates:EPVAdj for Debt & Excess CashAdj EPVO/S sharesEPV / shareBVPS / shareExcess EPVCurrent pricePrice / EPVPrem/Discount vs EPV
Upper bound - VC15%3,043.9524465,489.9519128.7416.81.7136.231.2626.05%
Combined NI & Div growth12.61%3,620.5724466,066.5719131.7616.81.8936.231.1414.07%
LT equity return; 2014 - 192811.53%3,960.0424466,406.0419133.5416.82.0036.231.088.02%
Arbitrary 2 <10% - 12 %>10.00%4,565.9224467,011.9219136.7116.82.1936.230.99-1.31%
Per GF9.58%4,766.1024467,212.1019137.7616.82.2536.230.96-4.05%
Arbitrary 17.50%6,087.9024468,533.9019144.6816.82.6636.230.81-18.91%
CAPM7.06%6,463.5324468,909.5319146.6516.82.7836.230.78-22.33%
Adj BetaRfRisk Premium%D%EAT Int cost
1.012.19%4.81%0%100%0.00%


A few takeaways:
  • I need to analyze the remaining segments further (including a comparative analysis vs. Fitbit whose valuation is a joke)
  • They pay a dividend of $1.95 per share.  This is equivalent to a yield of 5%
  • I ran the same analysis at $17.53, 50% below current and right at the 2009 low.  The remaining segment analysis ends up looking like this:

Cost of capital rates:EPVAdj for Debt & Excess CashAdj EPVO/S sharesEPV / shareBVPS / shareExcess EPVCurrent pricePrice / EPVPrem/Discount vs EPV
Upper bound - VC15%3,043.9524465,489.9519128.7416.81.7117.50.61-39.12%
Combined NI & Div growth12.61%3,620.5724466,066.5719131.7616.81.8917.50.55-44.90%
LT equity return; 2014 - 192811.53%3,960.0424466,406.0419133.5416.82.0017.50.52-47.82%
Arbitrary 2 <10% - 12 %>10.00%4,565.9224467,011.9219136.7116.82.1917.50.48-52.33%
Per GF9.58%4,766.1024467,212.1019137.7616.82.2517.50.46-53.65%
Arbitrary 17.50%6,087.9024468,533.9019144.6816.82.6617.50.39-60.83%
CAPM7.06%6,463.5324468,909.5319146.6516.82.7817.50.38-62.48%

At $17.50, ascribing zero value to the auto segment, the market cap becomes 191 x $17.50 = $3.3B, less net cash of $1.2B = $2.1B.  On the remaining segment adjusted EBIT, the cap rate becomes $460/$2.1B = 22%.  

Just for comparison's sake, here's Fitbit (which was up 25% this week on gut reaction to a Target deal!):
  • ttm EV/EBITDA of 21x
  • fwd P/E of 42x
  • P/S of 7x (on current yr revenue of $1.68B - note that the analysis of the remaining profitable segments above is based on expected revenue of $1.8B, ex autos, including Garmin's fitness device revenue of $289M for the 26 weeks ended June 27, 2015, or $578M annualized)
Finally, the long term chart (it's not pretty):  I can't comment on 06 through 08, the valuation was ridiculous and anyone who chased the perception of growth got rewarded in kind.  I suppose the meteoric rise (and similarly meteoric plunge) has put a sour taste in the mouths of anyone still holding from $117 here, and this reversal of sentiment could result in an opportunity if a careful analysis of the remaining segments proves worthwhile.

I can say with some confidence that if the remaining segments hold their own (Outdoor, Fitness, Marine and Aviation) and for whatever reason, Garmin gets down to net cash value of $6 per share, you'd basically be buying the remaining businesses for free, but we're a long way away from this possibility.

For now, I will keep this in my database of ideas.



2 comments:

  1. GRMN is a dividend name you never see in any long term dividend growth portfolio. Quite frankly, I'm not too keen on any tech company. Don't see much of a future for GRMN.

    ReplyDelete
  2. Keith you could very be well right. Am working on a follow up analysis currently...

    ReplyDelete