Morningstar | Garmin Reports Mixed 1Q Results as Auto Declines Continue; Maintaining $70 Fair Value Estimate
Garmin reported first-quarter earnings with net sales above our expectations and operating margins slightly below as the company continued to see pressure in the auto market coupled with growing strength in marine and aviation offerings. We continue to believe Garmin’s revenue growth will decelerate over the next five years as the mapping space has become increasingly more competitive, which we think will hurt the company’s auto segment the most--but possibly not leave marine, aviation, and outdoor products immune to such shocks. We are therefore maintaining our $70 fair value estimate. While the stock is down 8% as a result of earnings and is approaching our fair value estimate, we still consider this narrow-moat name to be overvalued.Garmin’s total revenue of $766 million during the quarter represented year-over-year growth of 8%. Particular strength came from the marine and aviation segments, which reported revenue growth of 18% and 17% year over year, respectively. Panoptix LiveScopesonars and chartplotters helped to drive strength in the marine sector, while aviation saw a boost due to aftermarket and OEM products. Revenue in the fitness segment grew by 9% as wearables continued to see strength--and we believe the segment should soon see help from its Tacx acquisition, which closed in early April. Meanwhile, the outdoor segment grew by 7% all around. The auto segment, which now represents the smallest proportion of revenue (tied with marine at 17%), reported a revenue decline of 10% largely due to secular weakening in the portable navigation device market. While we think auto revenue declines are decelerating, we continue to remain doubtful of any eventual growth in this segment given the multitude of substitutes for auto mapping products, many of which are mobile focused.
Fourth-quarter operating margins of 19.8% were down slightly from 20% earned in the year-ago quarter due to SG&A pressure from personnel and legal expenses. The company’s outdoor segment continues to boast the greatest operating margins--at 63%. Going forward, we believe that Garmin’s fitness sector will require increasing R&D costs given the competition in wearables innovation.
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