Garmin (GRMN) taps into the consumer's love for digital gadgets; the company makes GPS-enabled products used by athletes, hikers, boaters, pilots, drivers, and even dog trainers, asserts Richard Moroney, editor of Dow Theory Forecasts.
These devices tend to be geared toward activities that accommodate social distancing, which has helped boost demand during the pandemic. But even as the pandemic eases, Garmin should continue to benefit from consumers gaining more disposable income as the global economy expands.
Garmin shares have surged 12% in the past month, after the company comfortably topped June-quarter consensus profit and sales estimates, while also raising its full-year guidance. Management sees all five product categories — fitness, outdoor, aviation, marine, and auto — growing revenue by double-digits this year.
Although higher supply-chain costs cut into profitability, Garmin’s operating profit margin expanded to 28% last quarter, a threshold reached in just four quarters since 2009. Its operating margin in the year-ago quarter was 22%.
Garmin boasts strong cash-flow trends, with operating cash flow surging 54% for the 12 months ended June and free cash flow up 66% to $608 million. Cash and marketable securities on Garmin’s balance sheet have risen 19% in the past year to $3.2 billion, while long-term debt remains zero.
Management views paying an attractive dividend as its top priority for excess cash, followed by acquisitions, then reinvestment in its business. Earlier this year, Garmin raised its quarterly dividend 10% to $0.67 per share, its biggest annual hike since 2011. Garmin devotes just 43% of earnings to its dividend, leaving plenty of flexibility for more growth in coming years.
Entering the September quarter, production of Garmin’s devices was running near full capacity. But Garmin appears well-positioned to support future growth, with a new facility to open this fall set to double capacity in Taiwan.
Garmin also recently completed two new plants in Europe. Aiming to catch the airline industry’s rebound, in May Garmin acquired AeroData, a software company that provides performance data to commercial airplanes.
The stock’s Overall Quadrix score (our proprietary quantitative ranking system) has fallen to 62 from 84 in January, hurt by the prospect of weaker operating momentum and a rising valuation.
Operating growth could prove elusive in the second half of 2021, due to challenging year-over year comparisons from historically strong demand during the depths of the pandemic. But analyst estimates for 2022 are rising, with the consensus projecting 11% profit growth on 8% higher sales. Garmin is a Focus List Buy.