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Pitch: Stock price the last 2+ years largely driven by smartwatch growth. Smartwatch penetration appears to be peaking as GRMN begins to lose market share, largely to Apple. Forced upgrades of aviation systems have also juiced growth rates unsustainably the last few quarters – this is set to normalize at the end of this year.
· GRMN's stock got going in 2016 once the decline in the company's main product segment (Auto aka PNDs) was eclipsed by growth in the company's four other growth segments (Outdoor, Fitness, Marine, Aviation). Once the company went from shrinking to growing, the stock started working and the P/E multiple has re-rated over the past 3 years. The stock is now near all-time highs. Additionally, as Auto shrinkage was eclipsed by the Growth segments, margins also inflected as Auto has the lowest Gross and EBIT margins of the five segments. As such, Gross and EBIT margins are up ~400 bps and ~250 bps over the past 3 years, respectively. The company has done a very good job pivoting away from a dying category (Auto PNDs) and into growth areas (Aviation, Marine and Smartwatches).
· The crux of the short case focuses on two product areas: Smartwatches and Aviation. Smartwatch sales are spread across two segments: Outdoor and Fitness. They have been the main driver of both segments as Outdoor GPS handheld units are a no growth category and Fitness bands are also a dying breed (see FIT share price chart). In Aviation, while the company has been growing nicely with a strong global economy, growth ticked up in 2017 and 2018 as ADS-B regulations went into effect (all commercial/personal aircraft beginning 1/20 requires ADS-B technology on board). Thus, the short case is a combination of GRMN smartwatch growth peaking as a result of heightened Apple-led competition and – that the ADS-B upgrade cycle is ending soon and Aviation is going to see a down year in 2020.
· The smartwatch problems are happening now: in Q1, Outdoor and Fitness growth both missed full year growth estimates (10% each expected) by growing 6.8% and 8.6%, respectively. Guidance implies a pretty steep ramp in growth in the back half. Worse, Outdoor Gross margins were -140 bps and Fitness gross margins were -780 bps Y/Y. Keep in mind that GRMN's gross margins in both categories are materially above competitors like FIT and GPRO. Garmin's margins overall are quite impressive – especially in the consumer-led segments.
· Overall, I like this set up. Stock on all-time highs, low short interest, generates very high margins for a consumer electronics company that has a lot of competition. Third party app data you can purchase indicates that GRMN is beginning to lose smartwatch app share – notably to Apple.
· I think FY20 EPS consensus of $3.87 is at material risk of missing as growth slows. I'm at $3.25. At 18x that's a $58.50 stock (-28%).
DISCLAIMER: This is not a recommendation to buy or sell any investment. Additionally, this document should not be relied upon to make an investment decision as the numbers and figures presented are solely the author’s estimates. Investors should contact the company directly and read GRMN public filings to form their own opinions and make their own investment decisions. The author may transact in the securities of GRMN without notice.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Smartwatch sales slow - this shines through in both the Outdoor and Fitness segments.
Aviation sales slow as ADS-B upgrade cycle laps - Q4 or Q120.