Should You Navigate Away From Buying Garmin’s Stock?

With shares of Garmin (NASDAQ:GRMN) trading at around $39.79 is GRMN an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Should Garmin’s prospects lead you toward buying its stock, or will you be led into a lake? In case you haven’t already heard, several people have driven into a lake because they listened to their GPS system. Whether this was the fault of the GPS system or the driver at the wheel is debatable. The good news is that most people are smart enough not to drive into lakes and rivers, or off cliffs.

However, Garmin did drive its investors off a cliff in 2008. While it might be true that almost every stock got hit hard in 2008, Garmin’s stock plummeted in a way that is nearly incomprehensible. Imagine a suicidal man standing at the edge of a high cliff and then jumping. During the drop, the wind slows him down a little (we’ll pretend this is an exceptionally light individual.) Just prior to a ‘SPLAT!’ the suicidal man lands on an enormous trampoline provided by the local fire department. This then allowed the individual to bounce back up, but not nearly as high as he was previously. Yes, this story is highly unrealistic, but it’s exactly what has happened to Garmin’s stock since 2008. The ultimate point here is that another type of cliff might be coming, and if that particular cliff arrives, then Garmin will likely fall just as hard as it did in 2008. For now, let’s assume (or at least hope) that there will be no cliff.

Currently, Garmin has a Forward P/E of 13.86 and a 4.60% yield. Analysts are pretty evenly spread out between Buy, Sell, and Hold. Goldman Sachs (NYSE:GS) downgraded the stock to Sell and set a $34 price target on the stock. At the time, Garmin was trading at $37. It’s now selling around $39.79. Does this mean Goldman Sachs was wrong? We’ll have to dig a little deeper…

E = Equity to Debt Ratio is Strong

Garmin has a debt-to-equity ratio of 0.00, which is strong. One of Garmin’s biggest competitors, Trimble Navigation (NASDAQ:TRMB) has a debt-to-equity ratio of .35. Garmin also wins by a large margin on the balance sheet. Garmin has $1.37 billion in cash and no debt. Trimble Navigation has $141.84 million in cash and $643.11 million in debt. That’s quite a difference.

T = Technicals on the Stock Chart Are Marginal   

Over the past month, Garmin is up 5.73% while the S&P 500 is up .43%. Year-to-date, Garmin is up 2.75% while the S&P 500 is up 14.96%. Over the past calendar year, Garmin is up 11.37% while the S&P 500 is up 16.37%. Over the past three years, Garmin is up 46.87% while the S&P 500 is up 35.96%. Trimble Navigation is up 144.22% over the past three years.

At $39.79, Garmin is trading close to its 50-day SMA of $39.41. It’s also trading close to its 100-day SMA of $39.54. It’s trading slightly lower than its 200-day SMA of $41.84

E = Earnings and Revenue Are Not Overly Impressive

If you believe in annual revenue growth as a key factor for a company’s future prospects, then it looks as though Garmin has already peaked. Garmin may have raised guidance for 2013, but revenue is flat year-over-year. The strong dollar has also hurt sales. If our country decides to deleverage, then the dollar will only become stronger, which is bad news for Garmin.

2007

2008

2009

2010

2011

Revenue ($)in billions

3.18

3.49

2.95

2.69

2.76

Diluted EPS ($)

3.89

3.48

3.50

2.95

2.67

 

Quarterly earnings and revenue have been mixed. This has a lot to do with shrinking margins, increased competition, and the mix of good results in the Americas and Asia with poor results in Europe.  

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

666.99

909.64

556.60

718.15

672.38

Diluted EPS ($)

.77

.85

.44

.95

.72

 

T = Trends Do Not Support the Industry

With smartphones and tablets offering their own GPS systems, companies like Garmin and Trimble Navigation could be in trouble. You could say that Garmin is involved in other industries, which is true. Garmin also sells things like cockpit aviation systems, dog tracking devices, golf gadgets, and fish finders. How many people do you know own a private jet? Have you used your fish finder recently? The GPS market is by far the largest and it’s hurting. The potential for repeat customers is very limited. Garmin can’t excite people with a new GPS system. How would they do that? Make the voice a little sultrier? There simply isn’t much room for growth.

Conclusion

The balance sheet is stupendous, but without growth, it doesn’t mean much. The short percentage of the float is over 15%, which is enormous. Longs are hoping for a short squeeze, but that doesn’t seem likely to happen. Every sign points to a company that has had its day in the sun and will now begin to fade. It’s possible for Garmin to come up with something creative to boost sales, but as of right now there is nothing on the horizon that piques anyone’s interest. At the current time, Garmin is a STAY AWAY, but with a strong balance sheet and money to put toward innovation, this stock is worth revisiting at a later date.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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