Should This Satellite-Guided Cash Cow Be On Your Shopping List?

| About: Garmin Ltd. (GRMN)

I have completed extensive flight instruction, culminating with a commercial pilot certificate for multiengine airplanes. Anyone who has pursued aviation at a similar extent here in the U.S.A. knows that Garmin's (NASDAQ:GRMN) Global Positioning Systems ("GPS") are among the highly sought after systems in training aircraft. Finding one's way from a point of departure to a destination can be eased by means of GPS, and it makes things much simpler when visibility is lacking outside of the plane. Not surprisingly, aviation is one of the company's top business segments; however, marine and Personal Navigation Device ("PND") products are not doing nearly as well. Thus, though the stock offers considerable income, its future prospects are down to earth.

Garmin goes ex-dividend on March 13, and owners of record then should be paid $0.45 / share on the 29th. After the last day that the stock trades with rights to the dividend, market makers adjust its price down to compensate for lost value and outstanding call options also decline commensurately. Writing a $36 March call that expires on the 16th still brings $0.42 x 100 = $42 into one's brokerage account. Hypothetically, if GRMN trades at $35.75 on the 12th, it could open at $35.30 on the 13th with three full days of trading before options' expiration. So, if shares are purchased immediately at $35, the result could be an approximate profit of 2.77% [($42 + $45 = $97) / $3,500] in three weeks if it closes at the same price on Friday, the 15th.

If the stock does not close above $36 on the 15th, and thus is not sold to the option holder at a $1 per share profit, another covered call could then be written. So in all likelihood, an investor would only be looking at losses below $33.50 or so. The yield in this scenario for newly-acquired equity would be $0.45 * 4 / $33.50 = 5.37%. Our discussion has not included any compounding effect obtained through reinvested dividends, which can be significant.

Let's review the stock's recent action. On December 5, 2012, it became publicly known that Garmin would join the S&P 500 (proxy: SPY). This is a quite favorable situation for most corporations, signifying status and capital inflows from funds. Indeed, GRMN went from $39 to $42 the next day; and volume spiked from 2,460,030 to 23,668,760, exhibiting heavy accumulation, when it joined on the 11th. The stock has since reached its 52 week low of $34.57, on February 21, after reporting $0.68 per share in earnings on the 20th, a $0.06 miss.

Yahoo Finance has a $2.62 average earnings estimate for 2014, and a lagging five year growth rate of 4.85%: the stock remains expensive by these metrics. As of January 31, short interest is high at 14.5%. On the other hand, while the dividend yield and index fund holdings may be crucial to propping GRMN up, neither is a concern for the foreseeable future. Further, the company also has authorized a $300 million buyback, currently worth about 4.4% of its market cap, that could extend beyond 2013.

Indeed, Garmin does have plenty of money and little, if any, debt. However, it has been losing cash through its past five quarters despite strong Operating Activities numbers. Though its financial statements and results do not give reason to declare the dividend "safe," I would be shocked if it is decreased.

Even at the lowered price, any insider buying would be a lesser surprise. Executive management has just discussed a 17% drop in units shipped and revenue decline is an existential issue. Europe is a difficult location for the company; though, optimistically, business has bottomed there. There is no near-term reason to see improvement in the auto/mobile segment, which might bring in 50% of 2013 revenues after accounting for 67% a year ago. As positives, Garmin's gross margins remain healthy, as is its reported market share, and there is inclination that things may pick up in its four remaining operational divisions.

Here is a partial summary of what has been shared on the company's five segments during its Q4 2012 Conference Call:

  1. Marine: 6% year over year revenue decline, but improved 2013 revenue due to R&D investments in new product lines is anticipated.

  2. Aviation: year over year 2% revenue growth, and even with higher expenses, gross margin is at 73%, up from 65% a year ago. Cessna selected the G5000 for the Citation Sovereign and Longitude, and Bombardier is using it for Learjet models. Garmin is looking for an expanded share in the business jet market.

  3. Outdoor: 11% year over year growth. Management expects 5% to 10% continued revenue growth in 2013.

  4. Fitness: the company views as "under penetrated," and targets 5% to 10% revenue growth in 2013. New items include foot pods that track steps and distances traveled without using GPS, and a future Vector product described as "A very complicated and precise instrument."

  5. Auto/Mobile: revenue declined 25% in Q4 and PND unit deliveries to drop in 2013, [further] driving revenues down 15% to 20%. Overall declines globally in the PND market of around 20%. CFO Kevin Rauckman says that "…we have been gaining share…and we are going to track more in line with what the overall market is going forward." On a new K2 Platform, CEO Clifton Pemble says "In the auto industry, when you are talking about a new system, it can take anywhere from three to five years to come to fruition." Also, in response to questioning on in-dash products, he is "Not really prepared to…talk about 2014."

We have all blundered here and there, and I am no exception. However, let me share that I have yet to have an accident in an airplane. For anyone interested, there are plenty of names of living persons involved in aviation mishaps: Steve Wozniak, Colton Harris-Moore (aka "The Barefoot Bandit"); countless others who departed without enough fuel and glided down safely to be met by a carload of FAA agents; and even a guy who forgot to extend the wheels before landing, causing much derision from air traffic controllers around the world. Any opprobrium aside, I doubt the above parties--or noted pilots, such as Senator John McCain or Governor Rick Perry--would take a position against this company.

It remains to be seen if the intrepid short sellers have covered after their handsome profits. If not, they are soon liable for paying a dividend that is not being decreased any time soon. For everyone else, while it could be an advantageous time to take an ownership stake in Garmin, a bottomed stock price may not be obvious.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GRMN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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