Applying a Buffett Strategy to Garmin Stock

Nov. 9.10 | About: Garmin Ltd. (GRMN)

Perhaps the easiest way to stimulate a heated debate among Seeking Alpha users would to post an article or comment on anything related to Apple (OTC:APPL). A close runner-up might involve a remark relating to Warren Buffett’s prowess as an investor.

Case in point: The posts following Roger Nusbaum’s recent Seeking Alpha article Marty Whitman: Great Stock Picker, Wrong on Diversification. (Yes, I know it’s about Whitman, but it’s not as if anyone could have expected a discussion of diversification versus focus portfolios to go far without Warren Buffett being featured prominently, as has been the case with the discussion here.)

This comes at an interesting time for me since I had just been reviewing my all-star screens based on concepts Ben Graham and Warren Buffett looking for ideas. I noticed that Garmin (NASDAQ:GRMN) appears presently in both screens, and, in fact, has been there many times in the past when I looked at the lists, particularly the one based on Buffett.

GRMN, one of the big names and early leaders, in handheld navigation devices, would make for an interesting case study in a hotly debated topic within the above-mentioned forum discussion: the extent, if any, to which Buffett’s teachings are relevant to the average investor.

Action Plan for Implementing a Buffett Strategy

The easiest way to apply the teachings of Buffett or any other investor of comparable stature is to build a model (usually a stock screen; in my case a combination of stock screen and ranking system) based on one’s understanding of the ideas.

For starters, let’s be clear on one important thing. There is no such thing as a true publicly available Warren Buffett model. He, and others like him, came of age before stock screening and the like became readily available, so we cannot be sure how any of them would have used such tools had they been inclined to do so at all. And among those who are active in the modern era and who might, conceivably, use screening, they, understandably, are not speaking publicly about details.

With a screen, each numerical test is strict pass-fail. If, for example, you require return on equity to be at least 15%, a stock with a return of 14.99% will be omitted even if it meets all other tests by wide margins. How would Buffett himself react to such a situation? We don’t know? He never discussed it? I’m guessing he would let such a stock pass, but that’s just an opinion. I can’t prove it.

One reason I suspect flexibility is because anyone who has worked with screening has undoubtedly seen how easy it is to drive a result set to zero by being too demanding. Few companies are so perfect as to deliver everything an investor could possibly want (even a focus investor like Whitman). So to create a reasonable Buffett screen, or even to subjectively evaluate a stock while a book about Buffett is propped open next to one’s monitor, some flexibility will be necessary and some picking and choosing among ideas will have to occur. (That, by the way, is why my “all-star” models use very liberal screening tests and rely on ranking to hone in on the final list.)

Applying the Strategy to Garmin

As noted above, the Buffett model I created (explained in the Appendix below) has often picked up GRMN.

Tables 1 and 2, which summarize some useful numbers for GRMN, suggest why a firm like this might pop up in a model of this nature.

Table 1

Operating Margin %



Return on Equity %
















































Click to enlarge

TTM = Trailing 12 Months

Table 2

Free Cash Flow

Per share

Cash & Equiv.

($ mill.)

Price to

Free Cash Flow












































1257.9 *



Click to enlarge

P/E based on trailing 12 months EPS

* Latest qtr.

By the way, the company pays a dividend, but it’s not easy to get a handle on the amount. It’s an annual payment with the 2010 amount, $1.50 a share, up from $0.75 in 2009, having already been declared and paid. That was an unusually large boost, and we have no idea what the level will be in 2011. The company also buys back shares at times. This, too, is unpredictable, but one way or another, it does seem to indicate a willingness on the part of management to send some of the cash buildup back to shareholders.

So Is Garmin REALLY A Buffett Stock?

The fly in the ointment here is the fact that growth in the recent past has often gone south. Clearly, the recession was an issue, but so, too, and perhaps to a bigger extent, have been changes in the marketplace. Competition from other producers of handheld navigation devices has always been an issue but GRMN’s historical numbers suggest it handled that just fine. But the nature of the competitive arena is changing before our eyes as smart phones today typically include some sort of navigation features.

So needless to say, it’s tempting to move from the numbers to the qualitative aspects of Buffett’s teachings, particularly the supposed importance of predictability, one’s ability to be confident about the company’s business prospects many years into the future and say GRMN flunks.

But before ending the inquiry here, I think back to the mid- to late-1990s when I was covering Conglomerate stocks for Value Line and decided to add Berkshire Hathaway (NYSE:BRK.A), which turned out to have been a terrific experience that gave me the opportunity to speak regularly to Mr. Buffett.

Naturally, one aspect of maintaining coverage was to watch the portfolio closely. That was when I began to notice things that were not discussed by mainstream authors who wrote about Buffett. The one that sticks most in my mind was a news clipping (yes, back then we actually had clippings) to the effect that Berkshire Hathaway sold a position in McDonald's (NYSE:MCD), a stock that had not been listed in the annual among the prominent Berkshire holdings. That, in itself, was no big deal.

The annual report clearly stated that the positions listed were only those whose holdings were valued above a specified amount. But it did motivate me to call Buffett to check up on two things; one to confirm the fact that portfolio is traded beyond what we are publicly told (and the fact that while “forever” may be his publicly stated favorite holding period, it’s not the way he actually invests in real life) and more importantly to try to figure out why he bought MCD in the first place.

Back at that time, the company was a mess with badly kept restaurants, poor-quality food, bad service, and a tendency to slash prices in response to competitors that were circling like vultures. Needless to say, Buffett was not inclined to give much away.

My questions about how MCD seemed so unlike what one might expect of a Buffett stock were, ultimately, greeted with a drawled out “Well . . . “ followed by a chuckle. I got a similar response when I asked about American Express (NYSE:AXP), a disclosed big-BRK position and how they seemed to have abandoned their supposed franchise at the time by, it seemed, lowering the credit standards to include just about anybody with a pulse

So what about GRMN’s situation now? Is it a sure thing, a fat pitch, whatever the heck that is. Of course it’s not. Actually, it’s probably a pitch that starts out like a slow curve ball and speeds up and breaks lower as it moves closer. But then again, are its prospects so much muddier than were those of MCD and AXP back when I asked Buffett about them?

GRMN bears could suggest the company is right to be returning cash to shareholders and should even accelerate because the company has nothing better to do with the money. After all, dedicated handheld GPS navigation devices are passé and those of us who want this sort of thing will be using smart phones or tablets. That probably is why the stock’s valuation ratios are what they are.

Such sentiments aren’t completely off base. A case can be made, however, that the cynics are a bit myopic. Who is to say that GRMN won’t be powering the GPS functionality on tablets and smart phones. The company decided that it would not be worthwhile to continue to pursue a Garmin-branded smart phone, but it is beefing up its efforts in creating apps for other devices, and an early offering for some Blackberry models (which is a lot more than just maps) suggests that Garmin’s expertise in this field could make it a force to be reckoned with.

Then, too, there’s a lot more to Garmin than this. It makes devices for marine use and for aviation, devices geared specifically for different kinds of physical activity (running, cycling, golf), and even products for use with laptops. To get a sense of where this business can go beyond its simple where-the-heck-am-I roots, consider some examples: a marine product that uses sonar to detect location of fish, a running handheld that monitors heart rate and calorie consumption, turn-by-turn navigation geared specifically for truckers. And by the way, speaking of autos, who is to say that Garmin is dead in that market? Yes, original-equipment installations are edging out add-on dashboard-mounted devices, but don’t count Garmin out as a potential supplier of dashboard units. Maybe it’ll happen. Maybe it won’t. Automakers love to outsource and over the long term, the key will be whether Garmin will be able to produce a better product at a better price.

In considering how GRMN’s prospects stand today relative to where MCD and AXP did more than a decade ago when I questioned Buffett, I find that I can envision GRMN’s core competence being used to answer an evolving series of customer needs that might look something like this:

  • Where am I? (This is the traditional GRMN business.)
  • How do I get to where I want to go? (Turn-by-turn directions are a response to this.)
  • What can I do and what will I encounter when I get there? (This is evolving.)
  • What’s actually going on around me? (This looks to be at a much earlier stage of Garmin’s evolution.)

We’ve been thinking so far of Garmin as a hardware company. But from the way it’s been evolving to date, it looks like its expertise really lies in perception and evaluation. Going forward, it might, perhaps wind up working with others to ultimately deliver the content it comes up with (the smart phone app being one kind of example). If it were to happen, it wouldn’t be the first time a company adapted to a new world by de-emphasizing hardware: see e.g., International Business Machines (NYSE:IBM).

What We Learned From Buffett

You may be wondering why I’m bothering to work to look for a bullish case for GRMN. The answer goes back to Tables 1 and 2. Badly managed companies don’t usually produce numbers like that. There’s a reason why something like return on equity is so important to Buffett. It’s a vital indicator of management effectiveness. We can’t just read a book on Buffett and memorize a bunch of ratios. We also have to recognize why they’re important. If we are not willing to allow such numbers to set the tone for our subjective analysis, then we’re wasting our time talking about Buffett criteria.

I have to assume Buffett saw beyond the obvious with MCD, AXP, and countless other stocks. (And speaking of MCD, I don’t know if Buffett held onto a partial stake back then or has been in and out since, but one has to marvel about how wonderfully that company has gotten its act together since investors and analysts regularly took turns shoveling dirt all over it.)

So ultimately, we can’t really know if GRMN would qualify as a Buffett stock just as we have no idea whether or not Berkshire has a position in the stock right now. This is the case with any stock with any famous investor. If they don’t talk specifically, we can’t know.

We can learn a lot from Buffett (and others of his stature), but we cannot be him and we cannot replicate him. No matter how much he may put into the Berkshire annual reports over the years and how much he may say in interviews, there is always going to be something vital about his decision process we cannot know, and which he may or may not be able to articulate, even to himself. (What’s your favorite flavor of ice cream? Can you tell me why, in an objective way that I’d be able to use to predict what other foods you’d like?)

So ultimately with GRMN, we can learn two things from Buffett.

  1. First is the type of quantitative analysis that brings the stock into my radar in the first place.
  2. Second is a willingness to allow the numbers to frame the context for the rest of our analysis and motivate us to try to see beyond the obvious as we turn to the qualitative factors.

None of us will be right all the time. That’s OK. Buffett isn’t always right either, as he often acknowledges. But one who keeps doing those two things again and again and again would, legitimately, be able to claim to be applying Warren Buffett’s teachings.


My Buffett Model

It starts with the Warren Buffett screen:

  1. OTC stocks are barred.
  2. Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks we're looking for
  3. Market Capitalization is at least $250 million
  4. Current ratio must be at least 1.5
  5. Long-term debt must be no higher than 10% above working capital
  6. EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
  7. EPS in the latest annual period must be above EPS in the prior year and five years ago
  8. Five-year average Return on Equity ranks in the top 25%
  9. The trailing 12 month sustainable growth rate ranks in the top 25%

Companies that pass are then sorted based on the Warren Buffett ranking system:

Book Value - 33.33% of total

    1. 5-year growth rate in book value (100% of this category)

Valuation - 33.33% of total

    1. Market Capitalization divided by "Business Income" as defined in the screen (22.5% of this category)
    2. Price-to-Book Value (22.5% of this category)
    3. P/E based on trailing 12 months EPS (13.75% of this category)
    4. Price-to-Tangible Book Value (13.75% of this category)
    5. Price-to-Cash Flow per share (13.75% of this category)
    6. Price-to-Free Cash Flow per share (13.75% of this category)

Earnings Quality - 33.33% of total

    1. EPS Stability, as defined by the standard deviation of EPS in the past 16 quarters, lower is better (50% of this category)
    2. Cleanliness of Income Statement, as defined by the "absolute value" of the last four years’ worth of Business Income (which omits unusual items) minus the last four years of Operating Profit (which includes unusuals), lower is better (50% of this category)


The model was developed under the assumption that 15 stocks (those that pass the screen and rank highest under our Warren Buffett ranking system) would be selected and that the selections would be updated every four weeks.

Disclosure: No positions