Garmin: Cheap, But Not Yet a Value Stock

| About: Garmin Ltd. (GRMN)

Some writers on this site and others have argued that Garmin Ltd. (NASDAQ:GRMN) is an extremely cheap stock and that it meets several Buffett/Graham criteria for investment. Having completed a comprehensive analysis of the company, I am not so sure.

For starters, I will concede that GRMN looks cheap based on its financial metrics. The company has a fortress balance sheet that is only getting stronger. Though its sales have stagnated recently, Garmin does continue to throw off a lot of free cash.

However, as Buffett and Munger have said many times, investors should be business analysts first and foremost, not stock analysts. Though Garmin's business has been strong, I believe there is very little visibility into the future. I think that it is impossible to forecast the company's operating results with any degree of confidence. Basically, I don't think there is any margin of safety for the longs or the shorts here (GRMN has a high short interest).

The case against shorting Garmin is obvious. I would be uneasy shorting a company with a solid execution track record and impregnable balance sheet that is trading at a low multiple of free cash flow. The case against going long the shares is less apparent, but Garmin states the case itself repeatedly in its public filings: Like any company in a high-tech growth industry, GRMN must continually innovate in order to grow its earnings. For years, the company was able to do this, and it might well continue to develop new and exciting products for the foreseeable future. However, there is no way to tell when it will stumble, and, as the fates of many other tech companies have demonstrated, it can be very hard to recover from a stumble. In short, I do not see any way to predict what this company might look like in five or 10 years with any measure of confidence or conviction. One can hardly call the stock of any business with this degree of unpredictability a "value stock."

None of this is to say that Garmin will not return to robust growth in the future. It may well do so, and the stock could perform extremely well. Perhaps others have more insight than I do into what the company's product line might look like several years out. But absent such prescience, buying GRMN solely on the basis of its historical results and operating metrics is risky business. Value stocks have both strong track records and predictable futures. No doubt Garmin has the former, but the latter is uncertain.

Disclosure: No positions.