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Morningstar | Garmin Navigates to a Stable Moat Trend; Raising Fair Value Estimate to $72

We think Garmin’s narrow moat rating has now reached a point of stability as the company’s auto segment, which was responsible for our former negative moat trend outlook, has become a relatively small portion of the business (falling from 62% of revenue in 2010 to nearly 19% in 2018). We think the company’s rocky revenue growth over the last several years is over--and will turn toward more consistent growth over the next five years, as we project a five-year CAGR of 7%. All considered, we're increasing our fair value estimate to $72 from $70.

We are confident that the company will be able to achieve excess returns on invested capital over the long term, stemming particularly from Garmin’s strong positioning in its aviation and outdoors segments, which achieved operating margins of 34% and 36% in 2018, respectively. Such profitability is reflective of both segments’ switching costs and intangible assets, in our opinion. Additionally, we think Garmin’s marine segment boasts switching costs given the mission critical functions of some of its offerings. In all, we believe Garmin’s remaining segments are not value destructive--making for a ripe environment for stability in excess returns.

Looking ahead, we think that Garmin will continue to benefit from the impact of the Federal Aviation Administration’s ADS-B out mandate, though at a much lesser scale after January 2020. We also think the company’s fitness segment will see robust growth, despite limited mobile connectivity abilities, as Garmin's focus on fitness metrics adds value to users, in our opinion. Additionally, we think Garmin’s outdoors segment will see continued growth, driven particularly by its Fēnix line, as Garmin’s niche market customers have continuously shown a willingness to opt for Garmin premium sportswatches. With these growth drivers in mind, we expect slight operating leverage across all segments, other than auto, from 2019 to 2023.