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Morningstar | Garmin Tows in Strong Organic Growth in 3Q Results; Maintaining $62 FVE; Shares Fairly Valued

Garmin reported stellar third-quarter 2018 results above our revenue and operating margin expectations. Healthy demand in wearables and continuing organic growth in its marine segment--even after recent acquisitions--helped carry the results. Auto was the only segment to see top-line declines as the company struggled with a weakening PND market. We’re impressed by the narrow-moat company’s ability to increase its market share in markets like recreational boating, but we think momentum from some segments, like wearables, will erode as competition increases in Asia. As a result, we are maintaining our $62 fair value estimate. As Garmin's shares are trading in 3-star territory, we recommend a wider margin of safety before investing in this name.

Total revenue increased by 8% year over year to $810 million as Garmin’s GPS-enabled vivo product line outperformed in the fitness segment, leading to 14% year-over-year segment growth. Basic trackers sold especially well, which Garmin attributes to the tracker’s differentiation from it peers. However, we continue to believe this segment lacks moat sources that provide standout competitive advantages. We expect some pressure on pricing in this segment. In outdoors, revenue grew by 13% year over year as the Fenix line became a larger portion of the mix--which benefits the segment’s margins. In the marine segment, Garmin brought in 28% year-over -year growth. This segment’s organic revenue growth of around 14% was impressive, in our view, and it was accompanied by revenue from the Navionics acquisition in 2017. Management claims Garmin has low- to mid-teens growth in the recreational boating market, placing the firm ahead of competitors, as the overall market is estimated to be growing at only 4%. Garmin saw drastically different results in the auto segment. The segment experienced a 16% year-over-year decline in revenue due to the declining PND market, though not caused by eroding market share. Aviation grew by 17% year over year due to growth all around and benefited from customers not exercising product warranties.

As for profitability, Garmin’s 24.2% operating margin was up by 140 basis points from last year due to advertising expenses dropping by $1 million and R&D costs making up a smaller percentage of revenue.

To finish off the year, Garmin expects flat revenue for the fourth quarter, bringing full-year 2018 revenue of $3.3 billion and a higher-than-expected operating margin of 22%. While Garmin did not release fiscal 2019 guidance, we expect revenue growth to decelerate as wearables significantly lose momentum from more competition and pricing pressure, along with less demand in Asia.