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Garmin (NASDAQ:GRMN) has started 2012 strong and is now close to 52 week highs. For those of us who entered the stock in the $30s, is now a sensible exit point, or should we expect further upside?
We conclude that Garmin is close to fair value, and is probably a source of cash for other ideas unless you are committed to it for its relatively high yield and significant cash pile.

The Garmin Forerunner 901XT
Garmin is no longer just an automotive GPS company, and as the below device shows has had success with slim personal fitness tracking devices. The 901XT is waterproof, which enables Garmin devices to support swimmers as well as cyclists and runners.

Core Valuation Metrics (@ $46.67)

MetricValue
P/E - diluted 2011 EPS of $2.6717.5x
Forward 2012 P/E - management pro-forma guidance mid-point18.5x
Yield (subject to June '12 board approval)3.9%
Dividend payout ratio for 2012 (based on 2012 EPS guidance)71%
Price to book2.8x
Price to free cash flow 2011 (operating cashflow - capex)11.6x
Cash/marketable securities as % of market cap26%
2012 P/E after backing out cash/securities10.9x
2012 P/E based on my earnings estimates (below)16.6x

Implications - Garmin is no longer obviously cheap, however if you believe that investors will benefit from Garmin's relatively large cash pile, then that is a potential source of upside.

Current business unit performance

Implication - Garmin is reasonably well diversified and has other strong businesses to offset automotive weakness.

Possible 2012 Outcomes

Revenue growth - bull caseRevenue growth - bear case
Automotive/Mobile0%-10%
Outdoor15%5%
Aviation10%5%
Marine15%5%
Fitness25%10%
Resulting Operating Income Growth (weighed according to 2011 O.I. contribution)11.8%1.5%
Resulting EPS (approx.) 13% tax rate, $23M other income$3.02$2.75
Resulting P/E15.5x16.9x

Implication - management's guidance ($2.52) appears conservative, but even with a strong performance in 2012 Garmin's valuation may be ahead of the broader market, which is trading closer to 15x.

Stock price - P/E and earnings sensitivities

earnings $3.02 (bull case)$2.75 (bear case)$2.52 (guidance)
P/E - 15x (market)$45$41$38
17.5x (current)$53$48$44
20x (re-rating)$60$55$50

Observations

  • We should not fall in love with Garmin because of its 3.9% yield, though attractive it has a relatively high payout ratio behind it. For example, consider that BP (NYSE:BP) offers a higher yield, but a much lower payout ratio.
  • Nonetheless, Garmin is somewhat cheaper than it's immediate P/E ratio suggests, looking at free cashflow or backing out the cash on its balance sheet yields an earnings multiple of closer to 11x earnings. Garmin has been moderately acquisitive in 2011, and there is a risk that Garmin makes an acquisitions that destroy value in 2012.
  • Management's guidance for 2012 is very conservative just as it was for 2011, however even on more realistic estimates, Garmin is still at 15-17x earnings, so not obviously cheap.

Recommendation - not a compelling idea unless they announce a buyback.

Garmin does not stand out as being particularly cheap or expensive. For investors sensitive to yield it is not a bad holding, but we should not ignore that this is due to management's decision to payout a high ratio of earnings rather than signaling inherent value as is sometimes the case with a yield close to 4%.

Garmin is likely to beat expectations in 2011 and that may support the stock, but since most stock outperformance generally comes from changes in the p/e ratio it is unlikely that Garmin will see strong outperformance in 2012 without a re-rating, this is possible, but requires some optimism since Garmin is already on a multiple higher than the overall market.

It is appears just as likely as a re-rating that Garmin erodes the value of its significant cash pile by overpaying for an acquisition. Conversely, if Garmin were to buy back stock that would change my opinion, but they haven't done so since summer 2010 when the stock was at $30.

Source: Garmin's 2012 Outlook