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Overview

If I told you about a company that pays a 4.8% dividend, carries no long term debt and has a catalyst for substantial future growth, I'd more than likely have your attention. The company I'm describing is Garmin Ltd. (NASDAQ:GRMN). Garmin is the industry leader in portable navigation devices and automotive navigation units. They also manufacture a complete marine line and have an impressive array of highly regarded fitness computers. Yet with all these segments, the one that I feel promises the most growth is their highly rated aviation product line. So why is the stock down since third quarter earnings last week? Frankly, I think the market is being myopic.

Competitive Advantage

As a pilot for nearly 15 years I've been a longtime user of Garmin products. From the old panel-mounted units such as the GPS 150, through the 400 series moving maps, full-color portable units like the 496 and of course the G1000 'glass' avionics suite, they have made tremendous strides in capability. I originally demoed their brand-new G5000 panel mockup at the National Business Aircraft Association convention in 2010 and was impressed not only with the features and the ease of use, but by their use of touch-screen technology, something that was new to the business jet flight deck. Mostly, though, I've been impressed with the willingness of the manufacturers to accept Garmin as a new player considering how immense the competitive and regulatory barriers to entry are in this segment. For nearly twenty years Rockwell Collins (NYSE:COL) and Honeywell (NYSE:HON) have dominated the Part 25 (as opposed to light, general aviation) aircraft avionics display market. That domination appears to be fading though as Cessna Aircraft, a division of Textron (NYSE:TXT), have recently selected the G5000 avionics suite for their new Citation X, the redesigned Citation Sovereign and the Citation Latitude. Many of Cessna's piston and light jet fleet already come equipped with Garmin G1000 and G3000 avionics. Likewise, Brazilian manufacturer Embraer has been flying a variant of Garmin's G1000 on their Phenom 100 and 300 models since 2007.

Last May, in what may prove to be the biggest breakthrough, Bombardier announced that it had selected the G5000 for its Vision Flight Deck in the new Learjet 70 & 75 models. Bombardier is currently the third largest aircraft manufacturer in the world behind Boeing and Airbus, and builds aircraft ranging from light business jets to regional airliners. Should the Garmin flight deck perform well in the entry level Learjet 70 series, I believe it could lead to growth opportunities within the Bombardier fleet, perhaps even giving it an opportunity to compete in the growing large-cabin aircraft segment. With a multitude of configuration options such as Synthetic Vision, ADS-B and CPDLC capability, the G5000 can be tailored to suit nearly any application

Fundamentals

On October 31st Garmin released third quarter earnings of $0.74 per share which beat the average EPS estimate by $0.13. In fact, this marks the fifth consecutive quarter that Garmin has surpassed the average earnings estimates. Operating income increased from $147.4 million in the third quarter 2011, to 160.1 million in the third quarter 2012. Operating margins are also impressive at 24 percent in the third quarter and with 3Q gross margins of 53 percent. With nearly $1.4 billion in cash (over $7 per share) and no long term debt, the balance sheet is very healthy and the current ratio sits at 2.8. Full year EPS guidance was just raised to between $2.75 and $2.90

Not all of the numbers impress however. Free cash flow decreased in the third quarter to $155.4 million from $174.3 million a year earlier. Revenues from Europe, the Middle East and Africa were down 13% as well, being affected by the ongoing debt crisis. Sales of the automotive and portable navigation units are essentially flat and marine sales were down 7% over the second quarter, which is one reason why I believe their aviation market is so vital moving forward.

Valuation

Since many of Garmin's direct competitors are private companies, valuation comparisons are difficult. I'll use Honeywell and Rockwell Collins due to the aviation tilt of this article, but those two companies have revenues that are much more diverse so keep that in mind. With a forward P/E of 12.9 and a PEG ratio of 2.4, Garmin's stock may not appear to be an unusually tempting opportunity. But considering Garmin's tendency to beat earnings estimates and raise outlook those metrics may be on the conservative side. Compared to its peers Garmin appears to be fairly valued.

GRMN

HON

COL

Forward P/E

12.9

12.6

10.8

PEG Ratio

2.4

1.01

1.34

EV/EBITDA

7.9

12.5

7.3

Div Yield

4.8%

2.6%

2.2%

Dividend & Buybacks

In June 2012 Garmin raised their quarterly dividend from $0.40 to $0.45 per share. With this increase the payout ratio sits at a modest 0.60. In the past 10 years the number of outstanding shares has been reduced from roughly 216 million to 195 million. Both of these items should be viewed as a value-added benefit for the shareholder.

Conclusion

Today the aviation division of Garmin accounts for only 11 percent of revenues. With their entry into the Part 25 flight deck market, and especially their partnership with Bombardier, I feel that they'll gain significant market share moving forward. Garmin has five new cockpit certifications pending in 2013, which is more than any of its competitors. With a large cash position they are also well positioned to make acquisitions as necessary to maintain their lead in other market segments. Some patience will be needed by the shareholder, however, as the bulk of the growth I've predicted will likely occur in the 5+ year timeframe. With a 4.8% yield I'll bet most investors won't mind the wait.

Source: Garmin: High Yield, Poised For Growth