Weekly Equity Idea Highlight - 2018 05 23
GRMN saw steady secular decline in their returns from 2006-2014, as the company saw their competitive advantages defeated in their core markets by the likes of Google Maps. The market appears to expect that trend to continue going forward, expecting UAFRS-based (Uniform) ROA to decline by almost ½ over the next five years. However, the market does not appear to be recognizing the success the company has had since 2014 of reversing that trend, seeing ROA' rise from 15% to 17% levels, with continued investment in the business. Management has achieved this by successfully pivoting their business to end markets that are not as susceptible to disruption by their current competitors.
Incentives Dictate Behaviorâ„¢ analysis highlights that management compensation framework is focused on revenue growth, operating income growth, and operating margin. This is contrary to market concerns about lower growth and lower returns, as management is specifically focused to not let those trends happen, further giving conviction about the outlook for the business.
Earnings Call Forensicsâ„¢ of the Q1 2018 call also highlights that management is confident about growth across most of their end markets, and their ability to continue to drive gross margin, and operating margin expansion, which should lead to further ROA' expansion, not compression, going forward.
Considering low market expectations, management's success in pivoting their business and rediscovering growth opportunities that they can charge premium points for, strong execution, correct management alignment, and growing management confidence about their outlook, the company appears to be mispriced currently and there appears to be equity upside potential.