Garmin Offers Great Value Despite Flat Revenue Growth

| About: Garmin Ltd. (GRMN)

Garmin (NASDAQ:GRMN) released their fourth quarter earnings Wednesday. The results were much better than analysts expected and the shares were up almost 10%. At this moment, the shares trade 8% higher at $51. A couple of months ago, I published this article about Garmin. In the article, I argued that Garmin has 45%+ upside potential. At the time, the shares traded around $47.50. Garmin's performance during the fourth quarter confirms my bullish outlook for the stock. In fact, I believe that Garmin is undervalued considering the potential EPS growth in the next couple of years.

Fourth quarter highlights:

  • Net sales down by only -1% to $760 million
  • Non-automotive/mobile revenue growth 14% y-o-y
  • Operating margin up to 23% from 19% a year ago
  • EPS excluding one-time items up to $0.76 from $0.68 a share

Flat revenue

It is clear that Garmin will not be able to grow revenue substantially in the upcoming years. The company expects that its revenue will be flat this year (between $2.6-$2.7 billion) compared to 2013. In my previous article, I made several assumptions regarding the revenue increase/decrease of Garmin's segments. To check my previous assumptions, I compared the actual performance in the fourth quarter with the assumptions I made in my article (see table below).

Q4 2013E Q4 2013A Difference
Automotive/mobile -12% -7.5% -4.5%
Marine/aviation +5% +21% +16%
Outdoor +10% +7% -3%
Fitness +15% +14% -1%

The automotive and mobile revenue decreased faster than I expected. Further, the outdoor and fitness revenue increased less than I expected. However, the aviation and marine revenue increased far more than I expected. Overall, the total revenue in the fourth quarter is in line with my expectations.

Gross margin

Revenue growth is not the major catalyst for Garmin's share price. The driver for Garmin's share price is the improvement of the gross margin. The revenue in the automotive and mobile segments will decrease substantially (see table above) in the next years. However, the gross margins of these two segments are relatively low compared to the non-automotive and mobile segments: outdoor, aviation, fitness and marine.

In 2013, Garmin managed to make up for the lost revenue in the automotive and mobile segments, because the company earned more revenue in the other segments. I expect that Garmin will be able to fully compensate for the lost revenue in the automotive and mobile segments in the future. Ultimately, this will improve the gross margin. Garmin expects that the gross margin will improve to 54%-55% this year compared to 53% in 2013.

Dividend income

Although the company is ranked among technology peers, Garmin is a dividend income stock. The company paid a quarterly dividend of $0.45 a share in 2013. Along with the presentation of the fourth quarter earnings, Garmin proposed to raise its quarterly dividend payments to $0.48 a share. This represents a 6.7% increase year-over-year. Based on the current share price, the dividend yield is 3.76%.

Garmin is rich enough to support the increase of the quarterly dividend payments in the future. The company holds $2.8 billion in cash and marketable securities, according to the company's fourth quarter earnings report. Further, the company generated $574 million of free cash flow in 2013. The free cash flow exceeded Garmin's quarterly dividend payments ($352 million) and the purchase of own shares ($58 million) in 2013.


Garmin's fourth quarter earnings confirmed my bullish outlook for the stock. I expect that Garmin will continue to earn around $2.7 billion in revenue and that the company will improve their gross margin. Eventually, this will grow Garmin's earnings per share. Garmin is a great dividend income stock as well. Currently, the dividend yield is 3.76%. Given the strong balance sheet and the annual free cash flow, Garmin will be able to grow the dividend payments in the future. Overall, Garmin offers great value for investors (both dividend income and upside potential).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.