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Garmin Stock: Analysts Expect 40% Upside Potential
Stock Analysis & Ideas

Garmin Stock: Analysts Expect 40% Upside Potential

Garmin (GRMN) is a manufacturer of wireless devices that are sold worldwide. We think it is a good company, but we currently remain neutral on the stock.

Garmin’s Competitive Advantage

There are a couple of ways to quantify a company’s competitive advantage using only its income statement. The first method involves calculating the earnings power value (EPV).

Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value can be measured using total asset value. If earnings power value is higher than reproduction value, then a company is considered to have a competitive advantage.

The calculation is as follows:

EPV = EPV adjusted earnings / WACC

$18.256 billion = $1.424 billion / 0.078

Since Garmin has a total asset value of $7.854 billion, we can say that it does have a competitive advantage. In other words, assuming no growth for Garmin, it would require $7.854 billion of assets to generate $18.256 billion in value over time.

The second method to determine a competitive advantage is by looking at a company’s gross margins because it represents the premium that consumers are willing to pay over the cost of a product or service. An expanding gross margin indicates that a sustainable competitive advantage is present.

If an existing company has no edge, new competition would gradually take away market share, leading to decreasing gross margins as pricing wars ensue to remain competitive.

Taking a look at Garmin, gross margins have expanded in the past decade, going from 53% in 2012 to 58% in 2021. As a result, its gross margins indicate that a competitive advantage is present in this regard as well.

Profitability

In the last 12 months, Garmin has recorded $705 million in free cash flow. This signals that the company doesn’t have to rely on equity raises to continue funding its growth.

More importantly, its free cash flow has been volatile in recent years. To us, this means that the company’s free cash flows are not very predictable. However, its dividends have been rising steadily in the past several years. Therefore, income-seeking investors can find predictability in this regard as the dividend is well covered, with only a 45% payout ratio.

Risks

Since Garmin sells hardware products, it is vulnerable to supply chain issues. The rising costs of raw materials will likely cut into profits. In fact, management guided for operating margins to decrease from 24.5% in 2021 to 22.8% in 2022.

It is important for investors to remember that there is always the possibility that supply chains will actually worsen in 2022 before getting better. Thus, there is the possibility that margins may come in lower than expected.

However, there are also other risks associated with the company. According to TipRanks’ Risk Analysis, Garmin disclosed 38 risks in its most recent earnings report. The highest amount of risk came from the Finance & Corporate category.

Wall Street’s Take

Turning to Wall Street, Garmin has a Moderate Buy consensus rating, based on four Buys, two Holds, and zero Sells assigned in the past three months. The average Garmin price target of $155.67 implies 40.2% upside potential.

Final Thoughts

Garmin is a stock we like because of its competitive advantage and innovative products. We are neutral today because the stock is in a downtrend. However, we will be keeping a close eye on the stock to monitor for a trend reversal.

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