Company ProfileÂ (obtained fromÂ Google Finance):Â 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 TestsÂ (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
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|Value Based on 3% Growth||$41.33|
|Value Based on 0% Growth||$24.23|
|Market-implied growth rate||4.27%|
Balance Sheet – 9/30/2013Â
Earnings Per Share – Diluted
Earnings Per Share – Modern Graham (Calculating EPSmg)
Garmin Limited is an excellent company with regard to the requirements of Defensive Investors and Enterprising Investors. Â This company has strong financials, good dividend history, and stable earnings. Â As a result, it passes every requirement of the Defensive Investor, which is a rare accomplishment. Â However, from a valuation standpoint, the earnings growth has not been what it should be the last few years. Â In 2008, the company had $2.92 in EPSmg (normalized earnings) and is estimated to have only $2.85 for 2013. Â The company demonstrated superb growth early in the 2000s, but has failed to continue that pace. Â At this time, the market is still implying a growth rate of 4.27%, a rate that is not supported by the earnings history. Â As a result, despite being a very healthy company, Garmin appears to be overvalued. Â 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? Â Is Garmin Limited overvalued? Â Is the company suitable for either Defensive Investors or Enterprising Investors? Â Leave a comment or mentionÂ @ModernGrahamÂ on Twitter to discuss.
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Disclaimer: Â 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: Â Andrew Magill