Garmin (NYSE:GRMN)
Garmin (NYSE:GRMN)
A Swiss watch manufacturer for the modern world.
This is not investment advice.
I am not your fiduciary.
This is not the opinion of my employer.
Here is the inaugural equity analysis for The Geospatial Index. If you want to view this as a Google doc, click here. I have a Google sheet that spits these out using a handy extension called Document Studio.
Metadata
NYSE:GRMN
Date of Analysis (MM/DD/YYYY): 2/12/2023.
Date of financials (MM/DD/YYYY): 12/25/2021. Note that this may be a historical report and financials may be from years ago.
Idea source: panic in the market.
Analysis date price: USD95.910.
Framework outcomes:
Good Stocks Cheap: The price needs to drop -47% to USD50.5 in order to be cheap.
Growth With Value: The price needs to drop -2% to USD94.09 in order to be cheap.
Verdict: Don't Buy, Checklist:
Framework
Do I Understand It? Yes:
Understanding Statement
Search, detection, navigation, guidance, aeronautical, and nautical system and instrument manufacturing industry corporation Garmin is a vertically integrated manufacturer of smartwatches and GPSs for fitness and outdoor recreation consumers (70% OI) in the Americas (47% NI) and Europe (37%), they have 20% of the wearables market, in 2019 acquired indoor bicycle trainer company TACX for EUR170M, dividends are increasing and they have recently released two new watches.
Out of curiosity, I put Bing Chat to work on Garmin and it came back with some interesting extra detail. I cannot recommend this tool highly enough to assist with equities research. Here is the prompt I used:
garmin
Using the company name above, please provide a report to me starting with the company name as the title on one line. Starting on the next line, please tell me, in bullet points, in this order, the stock ticker and exchange, the products, customers, industry, legal form, operational form (including segments), geography, size. Then provide a paragraph describing extra details as you see fit. Then a bullet point list of up to 50 similar, publicly traded companies in the same industry from the same country, called "Local Competitors" as the one above with their Exchange:Ticker in brackets. Then a bullet point list of 50 similar publicly traded companies in the same industry from around the world, called "Global Competitors" as the one above with their Exchange:Ticker in brackets
To dig into the status a bit more, I used this prompt:
status of this business (address factors such as market dominance, dividend or stock split, recapitalisation, media coverage, litigation, court cases, recent partnerships, recent mergers/acquisitions/divestments/spin offs, changes to business model, activist investors, certain significant transactions or events, and senior personnel changes)
The result was really useful on account of Bing Chat’s ability to search the internet for up to date information and provide in text citations:
Is it Good? Yes:
To determine if Garmin Ltd. is good, it was analysed from three perspectives:
Past performance, to see if they’ve been good stewards of their capital.
If the company’s future is bright, considering breadth, forces, monopolies and market.
If the company is shareholder friendly, such as whether leaders behave like owners.
1. Does Garmin Ltd. Have Good Average Past Performance? Yes:
Judgement of past performance is based on averages over the past 5 years. Table of averages:
Was the performance in the most recent period good? No. Further detail by year is available in the next table.
Key:
Balance sheet comments:
Did not include accrued warranty costs or accrued sales program costs as these often go unclaimed.
Cashflow comments:
Took the average of growth capex and depreciation as there was a bit of a difference between the 2.
2. Does Garmin Ltd. Have a Bright Future? Yes:
Does Garmin Ltd. Have Enough Breadth? Yes:
Does this company have breadth of customers? Yes:
Amazon but no others accounted for 10% of sales. Top 10 customers accounted for 20-23% of sales annually since 2019 (p. 55 of 10-k).
Does this company have breadth of suppliers? Yes:
They are vertically integrated. This means they have more control over the manufacturing process and selection of suppliers. They admit some single source suppliers:
"Garmin purchases components from a large number of qualified suppliers. Although many components essential to Garmin’s business are generally available from multiple sources, certain key components are currently obtained by the Company from single or limited sources, which subjects Garmin to supply and pricing risks. For these components, we have limited near-term flexibility to use other suppliers if a current vendor becomes unavailable or is unable to meet our requirements. While extended disruptions at these suppliers could impact our ability to meet customer demand due to component shortages or increased lead times, or cause us to incur higher product costs, we believe these potential disruptions would not disproportionately disadvantage us relative to our competitors."
Overall it is hard to judge the situation but they've been going ok so far so doesn't seem dire.
Does Garmin Ltd. Confront Maximum 1 Strong Force? Yes:
The number of strong forces this company confronts is 1. To consider it further, there should not be more than 1.
The bargaining power of customers is Weak:
Number of customers: They sell products in 100 countries, there are probably millions of consumers, thousands of distributors including some of the world's most recognised retailers such as Walmart, Amazon and every consumer electronics store in existence.
Improbability of backward integration: The consumers and distributors that buy their products are unlikely to start making them, they're too complex.
Switching costs: Minimal.
Summary: There are too many and Amazon is unlikely to stop selling their watches as they're too popular.
The bargaining power of suppliers is Weak:
Number of suppliers: I could not find this information. You can see under supplier breadth, however, that they are vertically integrated and do have some single source suppliers.
Improbability of forward integration: Raw materials suppliers are unlikely to start manufacturing complex navigation products. Vertical integration also reduces the risk as they already own significant parts of the supply chain.
Switching costs: It is going to be high for their single source materials. Overall, Garmin has maintained high margins and return on capital employed, however.
Summary: They're yet another electronic products manufacturer. There is nothing particularly special about what they need from suppliers. Whilst there are some single source materials, they don't give more detail on what they are and the company has maintained strong returns regardless.
The threat of substitutes is Strong:
Wholly different products that perform the same basic function: Analog equivalents have long been abandoned. It is hard to think of any contemporary replacements that perform the same basic functions as smart watches and handheld GPSs..
Doing without: Plenty of people do without smart watches/fitness trackers. It makes the fitness experience simpler after a being bombarded with notifications and beeps. It would be harder, howerver, to do without marine and aviation navigation equipment. In a recession it is easy to envisage 'wearables' sales taking a plunge and this is at least a third of income.
Direct substitutes: They have been very helpful identifying competitors for all segments. Fitness it's the likes of Apple, Huawei, Fitbit. Outdoor it's Globalstar, Suunto, Casio. Avionics it's Honeywell, L-3, Thales. Marine it's Raymarine, Navico, Johnson. Automotive it's Rand McNally and TomTom. OEM infotainment it's Alpine, Panasonic, Harman.
Summary: They are losing money in their OEM automotive segment. So much that it overwhelms the income of other automtove such that overall automotive is losing money. Looking at the OEM automotive competition, it is easy to see why as arguably they're more established and well known in this space. It is a hotly constested market for fitness and outdoor recreation navigation/tracking products. Garmin, however, stands out for robust, versatile, highly functional and stylish products. People feel proud owning them almost to the degree of owning an Apple watch. It's a clear signal of one's commitment to fitness in a way that an Apple watch isn't quite as effective at. Other wearables do not have the heft of a Garmin. For example Samsung smart watches feel light and breakable buy comparison. Nevertheless, they are in the definition of a red ocean and face a constant strong threat of substitutes.
The threat of new entrants is Weak:
Barriers to entry; barriers to success: There are many competitors here, so the barriers to entry seem low. Barrier to success is not so low however, consider Fitbit's acquisition by Google since they didn't seem to be making it on their own..
Economies of scale: Garmin has an interesting remark here in their 10-k stemming from vertical integration:
"Garmin’s manufacturing resources rapidly and iteratively prototype designs, concepts, products and processes, achieving higher efficiency and resulting in lower cost. Garmin’s vertical integration approach enables leveraging of manufacturing resources across high, mid, and low volume products. Sharing of these resources across product lines favorably affects Garmin’s costs to produce its range of products, with lower volume products realizing the economies of scale of higher volume products."
Higher switching costs: It depends. There would not be a dramatic switching cost I don't think going from one fitness tracker or GPS handheld to another. Sure, you might have some waypoints or a fitness history but these can be downloaded as a file and presumably transferred to another device. Where it gets more difficult is avionics, marine and OEM automotive. Those devices can essentially be integrated into the design of the vehicle and are harder to switch out. You have to pay a mechanic a lot of labour.
Hard-to-get permits: They have certifications for their avionics factories. Their avionics products would also have certifications. I could not find anything about permits specifically in the 10-k
Summary: I get the feeling the big wearables wave is over. All the entrants that have come along have... come along. Apple has swooped in and created the world's most dominant watch brand. Android competitors are doing their best to create alternatives that people find positively undesirable. The Swiss watch manufacturers like TAG and Breitling are creating dodgy bloated things without the elegance of their mechanical counterparts that again no one wants. Yet the likes of Garmin and Suunto are making things with a mechanical watch feel that are undeniably rugged yet precise. They have a feeling of heft. They have enough functionality specific to the fitness and navigation world to make fitness fanatics feel like they need them. If you have a Garmin you are saying your are more of a dedicated runner than someone without one, in many running circles. So it's not just a matter of a device but also the brand cache that Garmin have built. They also have associations with their avionics and marine equipment and to a lesser degree their automotive GPSs. These associations add to the image of reliability and authority. New entrants will not be able to draw on this product depth for image and brand weight.
Does Garmin Ltd. Have a Monopoly? No:
Government: No.
Network: No.
Cost: No.
Brand: No.
Switching costs: No.
Ingrainedness: No.
Market Growing? Yes:
Wearables is a growing market niche. People are switching from simple quartz watches to connected ones. Garmin is a leader for those with a fitness focus.
3. Is Garmin Ltd. Shareholder Friendly? Yes:
Friendly on the Numbers? Yes:
The CEO’s salary is USD4,238,341 per year. This is 0.39% of the lower of free cash flow or net income. The highest paid outside director gets USD240,056 a year. On the numbers, is this a shareholder friendly company? Yes.
Ownership and material insider buying at market
The only insider to buy shares is Joseph Hartnett, director, once in 2014 and once in 2020. The rest is all insiders selling, and there is a huge amount of stock option grants. Overall, insiders own 20% of the business. This means they have strong alignment with public share holders.
Share repurchases
None mentioned.
Related party transactions
Nothing of note.
Dividends
10-K, P. 41: "our declared dividend increased from $0.61 per share for the four calendar quarters beginning in June 2020 to $0.67 per share for the four calendar quarters beginning in June 2021".
Shareholder Friendly Overall? Yes:
The leadership appears benign and they are aligned with public share holders through a high proportion of ownership.
Is it Cheap? No:
Analysis date price: USD95.910, cheap price: USD50.50. The price needs to drop -47% to USD50.5 in order to be cheap.
Discount Cash Flow Analysis
A discount cash flow analysis (DCF) is mentioned as a common method in How to Value a Business (Cowley, 2019). The below DCF has High Growth Period and Terminal or Stable Growth Period segments. The intrinsic values of each are summed to calculate the share price of the company that is warranted by the anticipated future cash flow, based on the geometric mean of its growth rate. A comparison between this price and the current price is another way to see how cheap the business is currently. For further details on what the below terms and numbers mean, consult Cowley (2019).
High Growth Period
Table 1. Parameters.
Terminal or Stable Growth Period
From this calculation we can see that, from the perspective of future cashflows, the intrinsic value of the business supports a price of USD117.612 per share. Note that this is only true if the following assumptions are correct:
The business grows for the next 4 years at a high rate of 17% per year.
The business grows perpetually thereafter at a rate of 5% per year.
The margin of safety should guide buying decisions in case these assumptions are wrong.
DCF Comments
They only have to drop 2% to be within 20% margin of safety when using a bog standard DCF.
Any Biases to Watch? Yes:
A negative behaviour gap occurs when emotions override logic, or when cognitive biases stop us perceiving the business as it is.
Affinity
They're in the Geospatial Index so I want them to do well and I want to like them. I also want a reason to buy them but they're not cheap right now.
__
When we like something related to a business, this can override logic.
Authority
They're a modern Swiss watch maker. They make nice looking devices that a lot of fit, attractive people like.
__
Just because someone authoritative says it’s good can override logic.
Conclusion
Garmin is a fantastic company and it’s good to see the Swiss haven’t been totally left behind by the modernisation of the watch industry. As shown in the checklist at the start, I understand them. I also see that they have had good past performance. They are have a bright future on account of decent customer and supplier breadth. They sail through the forces analysis except for threat of substitutes, but they’re in a red ocean so this is to be expected. I see no signs of gross theft on the part of the management. There is also a high proportion of insider ownership. Hence they seem shareholder friendly. Despite the recent drop, however, they are still not cheap. One could convince oneself to buy after a couple more percent of a drop in the share price if just using a DCF as the basis for your decision. If you are being more strict, however, and waiting for something like 8 years of free cash flow to buy the market cap, you need to wait more. It needs to drop by about half. This is where it’s important to watch for the biases of affinity and authority. Just because they’re in The Geospatial Index doesn’t mean I have to like them. Additionally, just because they’re backed by the authority of attractive, fit sports people also doesn’t mean I have to like them.
References
Garmin Ltd. material: https://www.garmin.com/en-GB/investors/sec/form10K/.
Wil’s Value Investing Tool.
Cowley, Alistair (2019). How to Value a Business. Accessed 2020-03-09: https://growthwithvalue.com/intrinsic-value-ebook/.
Marshall, Kenneth Jeffrey (2017). Good Stocks Cheap: Value Investing with Confidence for a Lifetime of Stock Market Outperformance. McGraw-Hill Education. Kindle Edition.