Bearish Call on Garmin (Nasdaq: GRMN) Shares

(This is a highly-abbreviated version of a full SumZero report republished with the author's consent)

Contributor: Arnold Kang
Firm: Private Fund. New York, NY.

Recommendation: Sell Shares of Garmin (Nasdaq: GRMN)
Timeframe: 1 to 2 Years
Recent Price: $43.75
Target Price: $25.00

Quick Thesis
Sell GRMN at current share price of $46 with target price of $25 for 41% profit. The core auto/mobile business is dying in spite of share gains and NOPAT and FCF will roughly halve in 2 years. Outdoor/fitness will not be able to offset declining earnings. These two segments contribute 78% of operating profits. Reallocation of operating expenses to non-auto/mobile segments is masking true segment operating margins

Peak EBIT margins seen between 30-40% in the mid-2000’s will fall to 12-15% margins or lower. Current share price reflects unsustainably high growth expectations in Garmin’s non-auto/mobile segments. As opposed to growing over 70% yoy during 2005-2007, Garmin’s overall sales begin to decline within 2 years.

The market expects dramatic sales growth in outdoor/fitness, marine, and aviation that won’t materialize even if volumes increase. Overall ASPs in outdoor/fitness will drop as a result of lower-end product offerings and increased competition. Channel checks at Garmin’s major distributors show many capable new competitors entering outdoor/fitness at similar if not lower price points. Increasing smartphone adoption is negatively affecting every facet of the business. TomTom, Garmin’s closest market comp, has fallen by over 40% in the past year while Garmin’s stock has gained~30% because the market believes Garmin’s other businesses will make up for huge declines in the core business. The golden age of Garmin is over, and it is time to ride this stock down to $25.

Garmin is a maturing consumer electronics business. The market’s optimistic view will change as Garmin fails to meet lofty growth expectations. In 12-18 months, this stock will be worth $25, implying 2012E FCF yield of 10.7% and 2012E EV/NOPAT of 10.5x. TomTom, Garmin’s closest public comp, trades at 2012E FCF yield of 17.3% and 2012E EV/NOPAT of 15.0x.

As opposed to growing sales at 134% CAGR from 1999-2008, sales declined 16% in 2009 and 9% in 2010. Given the declining profile of Garmin’s core business, a share price of $25 still implies a generous valuation. Unsurprisingly, Garmin’s returns have been and will continue to trend down for the next few years. Depending on how pessimistic the market becomes, a $25 target could even prove to be too high.

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