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Joseph Harry, Anti-Icarus (82 clicks)
Value, growth at reasonable price, long only, contrarian
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Garmin (GRMN) generates plenty of free cash flow and has a strong, cash-loaded balance sheet, but do those items make the company worthy of investment? Let's take a look at an overview of the company, including recently reported revenues from the last quarter, as well as its growth prospects.

According to Forbes, Garmin "designs, develops, manufactures and markets a diverse line of user-friendly handheld portable and fixed-mount products for the auto, mobile, outdoor, fitness, marine and general aviation markets." Garmin's GPS location devices are primarily powered by Nokia's (NOK) Navteq. This is a good symbiotic relationship that will help both companies remain as juggernauts in the GPS and location services business.

The company sports a nice, income-generating 4.5% yield. Garmin also has a solid balance sheet with a good amount of cash, as well as a strong net profit margin at 22.5%, according to Forbes. It also has little debt and a relatively strong competitive advantage as a leader in the OEM GPS market, as well as being financially sound from a fundamental perspective. The company continues to thrive even in today's tough global economy.

Garmin reported relatively good growth when it announced its second-quarter results (ended June 30, 2012):

  • Total revenue of $718 million, up 7% from $674 million in the second quarter of 2011
  • Total revenue of $1.27 billion, up 8% from $1.18 billion year‐to‐date 2011

Garmin has generated $211 million of free cash flow in the second quarter of 2012 and $328 million of free cash flow year to date. Garmin also increased its gross margin to 55% in 2012, compared to 47% in 2011.

CEO Dr. Min Kao commented on the results, stating:

In the second quarter of 2012 we again posted strong revenue, unit volumes, and operating income even though the global economy is still difficult... We have had a great first half; yet, we remain cautious given the macroeconomic dynamics facing each of our segments. Based on our first half performance, we are narrowing our full year revenue guidance to $2.75-$2.80 billion. This represents the high end of our prior range with improvement in auto/mobile and outdoor offset by the remaining segments. We are increasing our EPS guidance to $2.70-$2.85 due to the outstanding margins in the first half. Overall, we believe we are executing well in both the current environment and in preparation for long-term sustained growth.

Garmin, with a market cap of around $8 billion, is growing revenues and generating solid free cash flow, while also continuing to recognize the uncertainties in the macro environment in order to adapt if necessary. It is a solid company, in my opinion. The only problem is that it isn't exactly the most exciting company to invest in. Who knows, maybe it will get bought out -- perhaps by Apple (AAPL)? Even if it doesn't t get bought out, the dividend is here to stay.

The thing with Garmin is this: GPS now comes pretty much standard in all smartphones, and most consumers can have turn-by-turn navigation for free with their phone and can use it in their cars. So where can Garmin look for growth, without losing business to smartphones or getting bought out? How about aviation?

GPS for flight and aviation systems should be a good source of continual growth for Garmin. The company recognizes this and has been pursuing this opportunity. It recently entered the medium-lift helicopter market. It also has its foot in the commercial and private aircraft market.

At the end of Garmin's most recent quarter, the Aviation segment revenue increased 4% to $76 million, and is up about 4% year to date. Still, the company faces stiff competition from the industry leader in avionics, Honeywell (HON), which holds a dominant share of the market.

Garmin's best bet for growth is its outdoor and fitness segments. The company's outdoor segment revenue increased 24% to $100 million at the end of the most recent quarter, and the fitness segment revenue increased 5% to $82 million. Both segments are up significantly year to date as well.

Garmin's outdoor products include everything from golf products to dog-tracking devices. The company could continue growth through unique niche items such as these. The company's fitness segment also produces popular training devices, such as the Swim C, about which Garmin's CEO had this to say:

The product has already been well-received in the swimming community. We anticipate growth rates will improve in the second half of 2012 as we launch new products for the holiday season to drive further market penetration.

Garmin needs to adapt out of portable GPS devices because, let's face it, nobody wants to buy something they already have in their smartphone. Garmin seems to see this clearly, however, and is attempting to continue its avionics business as well as carve out a niche market for fitness training and outdoor products.

Garmin appears to lack catalysts to send it higher in terms of capital appreciation, but a juicy 4.5% yield that seems to be extremely safe (due to slow, steady, and predictable revenue growth) could be a nice source of income while waiting for something to happen. Garmin goes ex-div on Dec. 12, 2012.

Source: Generate A Solid 4.5% Yield With GPS-Giant Garmin