Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Garmin Limited (GRMN) fares in the ModernGraham valuation model.
Company 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 Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- 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 – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
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
|Value Based on 3% Growth||$40.46|
|Value Based on 0% Growth||$23.72|
|Market-implied growth rate||6.51%|
Balance Sheet – 3/29/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Garmin qualifies for the Enterprising Investor but not the Defensive Investor, who has major concerns with the insufficient earnings growth over the last ten years as well as the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of sufficient earnings growth over the last five years. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of L3 Communications (LLL). From a valuation side of things, the company appears to be overvalued after seeing a drop in its EPSmg (normalized earnings) from $3.29 in 2010 to an estimated $2.79 for 2014. This drop in earnings clearly does not support the market’s implied estimate of 6.51% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Garmin Limited (GRMN)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Be sure to review the previous ModernGraham Valuations of Garmin Limited (GRMN)!
Disclaimer: The author did not hold a position in Garmin Limited (GRMN) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.