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ModernGraham Valuation: Garmin Limited (GRMN)

moneyCompany Profile (obtained from Google Finance): Garmin Ltd. (Garmin) is a provider of navigation, communication and information devices and applications, which are enabled by global positioning system (GPS) technology. Garmin designs, develops, manufactures and markets a diverse family of hand-held, portable and fixed-mount GPS-enabled products and other navigation, communications and information products for the automotive/mobile, outdoor, fitness, marine, and general aviation markets. Garmin has four segments: Automotive/Mobile, Aviation, Marine, Outdoor and Fitness. In September 2012, its subsidiary acquired Nexus Marine AB, a designer and manufacturer of instrumentation for the sailing and yachting market.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 7/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $12.99
MG Opinion Overvalued
Value Based on 3% Growth $41.33
Value Based on 0% Growth $24.23
Market-implied growth rate 4.27%
NCAV $7.53
PEmg 17.04
Current Ratio 2.51
PB Ratio 2.66

Balance Sheet – 9/30/2013 

Current Assets $2,444,600,000
Current Liabilities $974,000,000
Total Debt $0
Total Assets $4,823,200,000
Intangible Assets $222,000,000
Total Liabilities $1,265,700,000
Outstanding Shares 195,220,000

Earnings Per Share – Diluted

2013 (estimate) $2.86
2012 $2.76
2011 $2.67
2010 $2.95
2009 $3.50
2008 $3.48
2007 $3.89
2006 $2.35
2005 $1.43
2004 $0.94
2003 $0.82
2002 $0.66

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimate) $2.85
2012 $2.92
2011 $3.10
2010 $3.29
2009 $3.28
2008 $2.92

Conclusion:

Garmin Limited is an excellent company with regard to the requirements of Defensive Investors and Enterprising Investors.  This company has strong financials, good dividend history, and stable earnings.  As a result, it passes every requirement of the Defensive Investor, which is a rare accomplishment.  However, from a valuation standpoint, the earnings growth has not been what it should be the last few years.  In 2008, the company had $2.92 in EPSmg (normalized earnings) and is estimated to have only $2.85 for 2013.  The company demonstrated superb growth early in the 2000s, but has failed to continue that pace.  At this time, the market is still implying a growth rate of 4.27%, a rate that is not supported by the earnings history.  As a result, despite being a very healthy company, Garmin appears to be overvalued.  It should remain on the radar of Defensive Investors and Enterprising Investors alike, but it may be best to wait for a better entrance point or for the company to improve its earnings.

What do you think?  Is Garmin Limited overvalued?  Is the company suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Garmin Limited at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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