Has Garmin Lost Its Way?

Garmin shocked Wall Street today by falling 8.3% during regular trading hours to a price of $94.01. Its shares were yet another victim of poor earnings reports plaguing tech stocks this quarters. The Wireless navigation, communications, and sporting device manufacturer underperformed the S&P500 and Nasdaq 100 composite indices by -11.1% and -12.8% after announcing a 12% dip in projected revenue and a 17% decrease in forward earnings per share.

Garmin ltd. has a trailing 12 month price to earnings (PE) ratio of 17.5 -- a metric that is obtained by dividing its share price by its trailing earnings per share of $5.6. The company's forward PE ratio, which is calculated in the same way but using its estimated future earnings per share of $4.9, stands at 19. Earnings refer to the net income of the company from its sales operations.

These metrics give us a good idea of how investors value the company relative to the profits from its sales. For reference, the average price to earnings ratio of a company on the S&P 500 has historically been around 20. The fact that a company's valuation is within this average range does not necessarily indicate its price will climb, however, and it does not give a reliable picture of its underlying business's health.

In the short term at least, focusing on the growth of earnings and revenue can shed light on whether the company's business is succeeding or not. Garmin ltd. has a year on year (YOY) quarterly earnings growth of -4.4% and a YOY quarterly gross revenue growth rate of 9.4%. With decreasing earnings but increasing sales revenue, the company is experiencing reduced margins because of an increase in costs of goods sold.

Despite the rec ent tightening, the company's gross profit margins are 57.3%, which can indicate that is has a durable competitive advantage. If a company has such high margins, it is probably not facing much price pressure from its competitors and has been able to maintain high prices without fear of losing customers. But these market advantages are not translating into price performance. Over the last year, Garmin ltd. is down -34.3%, underperforming the S&P 500 by -23.4%.

GRMN's levered free cashflow is $215,653,120, which represents the liquidity that is currently available for reinvestment in the business or dispersal to equity investors in the form of dividends. A positive free cash level is of course a good thing -- but investors tend to focus more on the trend and less on the absolute level of FCF in the current quarter. In Garmin's case, cashflows have been consistently high since 2018, indicating that the stock may not be on the wrong path after all.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.