NOTE: I had some difficulty with the formatting of this article. If you have any trouble reading the text here scroll to the bottom and I have embedded this entire article in scribd.

Key Statistics
Market Cap (millions) $ 5,410.00
Current Price $  27.82
Shares outstanding (millions) 194.60

Business Overview and Valuation

Garmin Ltd., together with its subsidiaries, designs, develops, manufactures, and markets global positioning system (GPS) enabled products and other navigation, communication, and information products worldwide. It operates in four segments: Automotive/Mobile, Outdoor/Fitness, Marine, and Aviation.

The automotive/mobile sector brings in the largest amount of the company’s revenue making up 69.7%. Outdoor/fitness, Aviation, and Marine make up 15.9%, 6.0%, and 8.4% of the company’s revenue respectively.

The Outdoor/fitness segment mostly consists of Personal network devices (PNDS) that are used for navigation in cars. Sometimes, Garmin sells the GPS devices for use in high end automobiles to the car manufacturer directly, and to customers who want a detachable device. Company also produces navigation devices for motorcycles, Garmin is constantly coming up with new and updated GPS systems and aggressively expanding its presence overseas.

The company is the worldwide leader in GPS technology. There is no data available on market share by segment, but Garmin holds 36% of the global GPS market share, followed by TomTom. TomTom a UK based GPS maker, is Garmin’s largest competitor and holds 45% of the European market share, and 24% of the North American market share.

Below are some valuation metrics of the company:

Valuation Ratios
P/E (TTM) 8.4
EV/ EBIT 5.18
EV/S (TTM) 1.4
P/BV (MRQ) 2.0
EV / OCF(ttm) 4.6
EV / FCF (ttm) 4.9
P/CF (TTM) 5.9
P/FCF (TTM) 6.2
EV / EBITDA (TTM) 4.6
Dividend Yield 5.4%
Piotroski (TTM) 8
Altman (MRQ) 6.28

According to almost all these metrics (with the exception of P/B) the company is very undervalued. I will state what I believe the intrinsic value towards the end of the article. However, there are aspects of the company that I believe is causing the market to severely underestimate the true value of the company which must be examined first.

Most analysts are obsessed with the spread of smart phones and the possible negative effect it will have on Garmin’s profitability in the automotive/outdoor sector. This is the main reason why I believe the stock is so mispriced by the market. The bears argue that the smart phones are a threat to the automotive/outdoor segment which is the largest chunk of Garmin’s revenues.

However, these analysts neglect the fact that the three other divisions have even higher profit margins than the automotive sector, and that Garmin dominates these areas.

Gross Margin

52-weeks ended

December 26, 2009

52-weeks ended

December 27, 2008

Year over Year
Gross Profit % of Revenues Gross Profit % of Revenues $ Change % Change
Outdoor/Fitness $ 306,842 65.4 % $ 246,746 57.7 % $ 60,096 24.4 %
Marine 105,215 59.2 % 111,425 54.5 % (6,210 ) -5.6 %
Automotive/Mobile 861,900 42.0 % 977,595 38.5 % (115,695 ) -11.8 %
Aviation 170,154 69.2 % 217,749 67.3 % (47,595 ) -21.9 %

There has been reasonable organic growth in the three industries over the past several years.

Year Segment
Outdoor/Fitness Marine Automotive/Mobile Aviation Total
2009 306,842 105,215 861,900 170,154 1,444,111
2008 246,746 111,425 977,595 217,749 1,553,515
2007 184,655 110,169 973,205 195,226 1,463,355
2006 163,638 92,952 475,191 150,605 882,386
2005 124,791 80,951 177,638 151,690 535,070

As can be seen from the chart above, while the extremely impressive revenue increases have come from the automotive sector, the three other segments have produced satisfactory growth. Outdoor/fitness has grown by 250%, Marine has increased by 30%, Aviation 12% (excluding 2009 the number would be 44%).

The main growth has come from the automotive sector, but the marine and aviation sectors have had decent growth, and the outdoor sector has demonstrated phenomenal growth.

Data from the latest quarterly filling reveal that this growth has continued. Outdoor, Aviation, and Marine revenue have increased 28%, 9%, and 12% respectively.

Garmin’s main revenues come from Europe, and North America. However, the company is starting to make inroads into Asia. Revenue was up 54% YOY.

Gross Profit

Outdoor/Fitness $ 157,325 64.2 % $ 121,639 64.7 % $ 35,686 29.3 %
Marine 73,338 63.4 % 58,658 59.7 % 14,680 25.0 %
Automotive/Mobile 300,110 44.9 % 279,258 40.1 % 20,852 7.5 %
Aviation 91,788 70.1 % 88,054 71.4 % 3,734 4.2 %
Total $ 622,561 53.7 % $ 547,609 49.5 % $ 74,952
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