Garmin To Acquire Tacx For Indoor Smart Training Push

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About: Garmin Ltd. (GRMN)
by: Donovan Jones
Summary

Garmin said it will acquire Tacx for an undisclosed sum.

Tacx has developed a family of indoor training equipment and related software and services.

The deal provides GRMN with a new and vertically integrated product line that it can distribute through its network and build upon.

Quick Take

Garmin (GRMN) announced it has agreed to acquire Tacx Onroerend en Roerend Goed for an undisclosed amount.

Tacx manufactures training equipment, including indoor bike trainers, tools, accessories, and software.

With the deal for Tacx, GRMN gains a high-quality line of app-enabled indoor fitness training equipment that it can sell through its wide distribution network and build additional product extensions.

Target Company

Wassenaar, Netherlands-based Tacx was founded in 1957 to design and manufacture indoor bike trainers, tools, and accessories including indoor training software. Management is headed by CEO Koos Tacx.

Below is an overview video of the Tacx Neo 2 Smart bike trainer:

Source: Tacx

Tacx's primary offerings include:

  • Flux 2 Smart
  • Neo 2 Smart
  • Magnum Smart
  • Tacx Software

Source: Tacx

For an in-depth article about Tacx' manufacturing advantages and company ethos, visit here.

Market & Competition

According to a market research report by Global Market Insights, the global fitness equipment market is projected to grow from over $10 billion in 2017 to over $14 billion by 2024.

This represents a CAGR of 4% between 2018 and 2024.

The main drivers for this expected growth are a rising geriatric population and adoption of smartphones and connected technologies.

The North American region is projected to account for over 35% of the global fitness equipment market in 2017 while the Asia-Pacific region is expected to grow at the fastest rate due to increasing disposable income and the adoption of new technologies led by China, Japan, and India.

Major competitive vendors that provide fitness equipment include:

  • HOIST Fitness Systems
  • Johnson Health Tech (1736.TW)
  • Amer Sports (OTCPK:AGPDY) (AMEAS.HE)
  • Fitness EM
  • Brunswick Corporation (BC)
  • True Fitness
  • Technogym (OTCPK:TCCHF) (TGYM.MI)
  • Peloton

Source: Sentieo

Acquisition Terms and Rationale

GRMN didn't disclose the acquisition price or terms and didn't file a Form 8-K or provide a change in financial guidance, so the transaction was likely for a financially non-material amount.

A review of the firm's most recent 10-Q filing indicates that as of September 29, 2018, GRMN had $1.2 billion in cash, equivalents, and marketable securities and $1.06 billion in total liabilities, of which $854 million were classified as current liabilities.

Free cash flow during the 39 weeks ended September 29, 2018, was $580.2 million.

Garmin is acquiring Tacx for its high-quality bicycle manufacturing and integrated software system.

As Garmin president and CEO Cliff Pemble stated in the deal announcement:

Tacx brings an entirely new product category to Garmin's fitness portfolio that expands our reach into the indoor training market. Together with Tacx, Garmin will offer a seamless, enjoyable and motivating indoor and outdoor experience for cyclists all year long.

In the past 12 months, GRMN's stock price has risen 18.2% vs. competitor TomTom's (OTCPK:TMOAY) drop of 16.9%, as the chart below indicates:

Source: Sentieo

Garmin has a consistent history of positive earnings surprises, leading me to wonder whether management consistently underestimates earnings to manage a 'beat' every time:

Source: Seeking Alpha

Analyst ratings range from 'Hold' to 'Sell' and the current consensus price target of $65.83 is 7.8% below its current price of $71.40:

Source: Seeking Alpha

A linguistic analysis of analyst sentiment in earnings calls since 2017 shows sentiment has been generally consistent:

Source: Sentieo

With the deal for Tacx, it appears Garmin wants to go after the Peloton market opportunity for app-enabled indoor cycling enthusiasts.

So, this bolt-on acquisition comes as Tacx was slated to invest in new R&D and production capacity. With Garmin's greater resources, it was likely a financially opportune moment to sell its vertically integrated operation as a 'turnkey' business to Garmin.

Combined with Garmin's global distribution network, the Tacx deal should provide the firm with new products for younger demographics while retaining higher margins for premium experiences.

While we don't know what Garmin paid for the acquisition, the addition of a high-quality operation should benefit Garmin, and over the medium term, GRMN shareholders.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.