Weekly Equity Idea Highlight - 2018 04 11
GRMN saw steady secular decline in their returns from 2006-2014, as the company saw their competitive advantages defeated in their core markets defeated by the likes of Google Maps. The market appears to expect that tend to continue going forward, expecting UAFRS Adjusted ROA to decline by over 1/3 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 19% 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 Q4 2017 earnings call also highlighted that management is confident about growth across several of their end markets, and their ability to continue to drive gross 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, and correct management alignment, the company appears to be mispriced currently and there appears to be equity upside potential.
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