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Morningstar | Garmin Navigates to a Stable Moat Trend

Garmin specializes in GPS-enabled hardware and software for recreational as well as defense needs. The company became a household name with the debut of its automotive portable navigation device. However, as smartphone apps have disrupted the PND market, Garmin’s major revenue sources have shifted to its aviation and marine segments as well as its fitness and outdoor segments as the smartwatch market has taken off. We’re confident that Garmin, after shedding most of its auto segment, will be able to uphold excess returns on capital in the long term, given the robust operating margins that we think the company will be able to maintain in its moaty segments: aviation, marine, and outdoors.Garmin has experienced better-than-usual tailwinds in its aviation segment as the U.S. Federal Aviation Administration implements its modernization initiatives, which include a switch from radar-based positioning of planes under air traffic control’s airspace to broadcast technology. The switch requires the installation of automatic dependent surveillance broadcast (ADS-B) out transponders in general aircraft (noncommercial) by January 2020. Even after the benefits of the mandate are incurred, we think the aviation segment will maintain its foothold in defense and general aircraft as the avionics space is highly regulated and Garmin has proved its ability to obtain original-equipment manufacturer wins. We think Garmin’s position in the outdoor segment is strong. Although Garmin has many competitors to its fitness smartwatch offering, we think the premium outdoor smartwatch is not likely to face the threat of new entrants, as the market for such high-end sports watches is small and we think potential new entrants are aware of Garmin’s perception as the industry standard and the difficulty in overturning this source of the segment’s pricing power.We believe Garmin’s marine segment is also well positioned. We think the full array of marine navigation offerings makes Garmin an attractive supplier for OEMs of recreational boats and the company is making the right calls to continuously innovate the segment offerings to win more OEM contracts.