What Garmin (GRMN) Investors Need to Know

Garmin, a scientific & technical instruments company, has been trading flat today with its current price at $90.45. This is -13.3% below its average analyst target price of $104.33. The average analyst rating for the stock is hold. GRMN lagged the S&P 500 index by -0.2% so far today and by -14.1% over the last year, returning -32.0%.

Garmin Ltd. designs, develops, manufactures, markets, and distributes a range of wireless devices in the Americas, the Asia Pacific, Australian Continent, Europe, the Middle East, and Africa. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.

Garmin's trailing 12 month P/E ratio is 18.1, based on its trailing Eps of $5. The company has a forward P/E ratio of 16.9 according to its forward Eps of $5.36 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US technology companies is 26.5, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

To better understand GRMN’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

Garmin’s PEG is 6.8, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on GRMN's margins:

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2021-12-31 4,982,795,000 2,092,336,000 58.01 -2.13
2020-12-31 4,186,573,000 1,705,237,000 59.27 -0.3
2019-12-31 3,757,505,000 1,523,529,000 59.45 0.52
2018-12-31 3,347,444,000 1,367,725,000 59.14 n/a
  • Average gross margin: 59.0 %
  • Average gross margin growth rate: -0.6 %
  • Coefficient of variability (higher numbers indicating more instability): 1.1 %

We can see from the above that Garmin's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Garmin was $702,840,000.00 as of its last annual report. Over the last 4 years, the company's average free cash flow has been $746,986,750.00 and they've been growing at an average rate of 4.7%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in GRMN have received an annualized dividend yield of 3.2% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Garmin's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3.0, but is still below the average P/B ratio of the Technology sector, which stood at 5.57 as of the third quarter of 2022.

Since it has a lower P/E ratio than the sector average, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with an upwards trend, Garmin is likely undervalued at today's prices. The company has mixed growth indicators because of an inflated PEG ratio and consistently strong gross margins with a stable trend. We hope you enjoyed this overview of GRMN's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

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.