Garmin Ltd.
Nasdaq: GRMN
Initiate with Neutral Rating
Garmin Ltd. designs, develops, manufactures, and markets hand-held,
portable and fixed-mount global positioning system (GPS) enabled
products and other navigation, communication, and information
products for the automotive/mobile, outdoor, fitness, marine, and general
aviation markets worldwide. Garmin Ltd. sells its products through a
network of independent dealers and distributors, as well as through
original equipment manufacturers. The company was founded in 1990
and is based in Schaffhausen, Switzerland.
November 1, 2013
•
•
•
Garmin is a premier consumer & industrial electronics
company. Although its largest line of business – personal
navigation devices (think windshield mounted GPS units) is
contracting due to the increasing prevalence of smart
phone technology, the company still generates significant
high margin sales from this category. Additionally, the
company’s other business lines – fitness, maritime and
aviation products -- are showing meaningful top line growth
with healthy margins.
Garmin has lots of cash and no debt. It had a net cash
position of $14.33 per share at September 28, 2013, and is
returning cash to shareholders through a sizeable dividend.
It’s also increasing value through a share buyback. We think
additional value could be achieved at some point through
strategic acquisitions -- such as a move into the mobile
resource management sector – which would potentially
lever the company’s expertise and perhaps provide a
stream of recurring service revenue, though this doesn’t
appear to be a priority at the moment as the company
focuses on smaller technology “tuck ins”.
The stock looks fully valued. The stock trades at a market
multiple after backing out its significant cash position,
despite its below average EPS growth prospects. The price is
supported by the company’s high dividend which yields
about 3.7%. Accordingly, we rate the shares Neutral at this
time.
Rating
Risk Rating
Current Price
12-month Price Target
Implied dividend yield
Projected total return
Neutral
Moderate
$46.75
NA
3.7%
3.7%
Shares outstanding (M)
Market capitalization (M)
Long term debt (MRQ) (M)
Cash (MRQ) (M)
Enterprise value (M)
EV/2013 EBITDA estimate
EV/2014 EBITDA estimate
195.2
$9,126 m
$0
$2,797
$6,329
9.6x
9.2x
Average daily volume (3 m)
Float as % of shares out.
Short interest as % of Float
Insider ownership
Institutional ownership
1,441,000
62%
13%
35%
39%
Tangible book value p/s
Cash/share
$17.09
$14.33
P/E 2013 E
P/E 2014 E
19.0x
18.3X
EPS (pro-forma, recurring)
Q1
Q2
Q3
Q4
FY
2011
$0.43
$0.63
$0.71
$0.77
$2.53
Q1
Q2
Q3
Q4
FY
2011
$508
$674
$667
$910
$2,759
2012
$0.45
$0.98
$0.75
$0.68
$2.86
2013E
$0.40A
$0.76A
$0.69A
$0.71
$2.46
2014E
$0.45
$0.77
$0.66
$0.78
$2.55
Revenue (M)
2012
$557
$718
$672
$769
$2,716
2013E
$532A
$697A
$644A
$708
$2,580
2014E
$530
$690
$637
$701
$2,558
Michael Rindos, 212-939-6427
mrindos@midtownpartners.com
Midtown Partners does and seeks to do business with companies covered in Midtown Partners Research. As a result, investors should be aware that the firm may have a conflict of interest
that could affect the objectivity of Midtown Partners Research. Investors should consider Midtown Partners Research as only a single factor in making their investment decision. For analyst
certification and other important disclosures, refer to the “Important Notices and Disclosures” section located at the end of this report.
InvestmentThesis
We initiate coverage of Garmin Ltd. shares with a Neutral rating. We note the stock has made a
significant advance during the past 12 months as investors have been attracted to the issue for its high
dividend yield (3.7%), which seems secure for the foreseeable future given the company’s solid
profitability and significant cash position. However, given that 50% of the company’s sales are
generated from portable navigation devices designed for the automotive aftermarket, a segment that is
contracting substantially due to replacement by the increasing presence of smartphones and mapping
apps, we don’t see material growth ahead until increases from its other product lines overtake the
decreases taking place in the PND segment based on the company’s current trajectory.
However, given Garmin’s deep pockets, and expertise in the area, we believe the company is in a good
position to build or acquire a mobile resources management franchise and/or become a major player in
“connected car” initiatives. Such initiatives may enable the company to capitalize on the large growth
projected for those sectors and allow it to generate recurring service revenue. For the moment,
management’s position is to focus on smaller, sub $100 million, “tuck in technology” acquisitions.
Valuation
We believe GRMN shares are fairly priced when compared to the S&P 500. We estimate the stock is
trading at 18 times our 2014 recurring EPS estimate (excludes the impact of currency exchange) and 13
times our 2014 EPS estimate after excluding company’s cash and marketable securities. GRMN trades at
13.2x our 2013 pro forma EPS estimate, with a yield of 3.7%. In comparison, the S&P 500 is trading at 16
times 2013 estimate with a dividend yield of 2.1%. The projected annual growth of the index’s earnings
is 11.55% compared to only marginal growth in the short run for Garmin.
Overview
Garmin is a leading worldwide provider of navigation, communication and information devices and
applications, most of which are enabled by Global Positioning System (GPS) technology. Garmin designs,
develops, manufactures and markets a diverse family of hand-held, portable and fixed-mount GPSenabled products and other navigation, communications and information products for the
automotive/mobile, outdoor, fitness, marine, and general aviation markets. The company is known
largely for its personal navigation devices (PND). Their vertically integrated business model keeps all
designs, manufacturing, marketing, and warehouse processes in-house, giving them more control over
their business operations. Garmin has more than 9200 associates in 35 offices worldwide.
Garmin’s products are sold through a worldwide network of approximately 4,000 independent dealers
and distributors in 100 countries. The company’s main facilities are located in Kansas, the U.K., and
Taiwan. Each facility has a sales force that covers specific geographical locations throughout the world.
Garmin’s main dealers and distributors of their consumer products include Best Buy, Amazon, Costco,
Halford’s, Petra, Target, Wal-Mart, and Wynit.
2|Page
Michael Rindos, 212-939-6427
In addition to traditional distribution channels, the company has many relationships with original
equipment manufacturers (OEMs) in the automotive, marine, and aviation sectors. In the automotive
sector, they have contracts with Chrysler, Toyota, Suzuki, Volkswagen, Harley-Davidson, Ford, BMW,
Honda, Mercedes-Benz, Smart Car, Peugeot, Hyundai, Kia, Mazda, Nissan, Bombardier, and Polaris. They
have relationships with multiple rental car companies as well. In the marine segment, they have
relationships with boat manufacturers such as Ranger Tugs, Cutwater Boats, Bayliner Boats, Bavaria
Yachts, Yamaha, Edgewater Boats, and Bennington Marine. In the aviation market, Garmin’s avionics are
either standard equipment or options on various models of aircraft built by AgustaWestland,
Bombardier, Bell Helicopter Textron, Inc., Cessna Aircraft Company, Cirrus Aircraft, Construzioni
Aeronautiche Tecnam S.r.l (Tecnam), DAHER-SOCATA, Diamond Aircraft Industries, Inc., Embraer SA,
Eurocopter, an EADS Company, Hawker Beechcraft Aircraft Company, Northrop Grumman Corporation,
Pilatus Aircraft Ltd, Piper Aircraft, Inc., Quest Aircraft Company, Robinson Helicopter Company, and
Vulcanair Aircraft S.p.A.
Garmin’s automotive sector dominates the business by generating roughly 50% of its revenue. In 2012,
Garmin produced revenue of $2.7 billion, a decrease of 2% decrease from the previous year. In the most
recent quarter ended September 28, 2013, the automotive/mobile segment generated revenue of $643,
a 4% decrease relative to last year’s sales result. By contrast, its fitness, marine and aviation segments
are growing the fastest of smaller base revenues.
Garmin has a substantial cash position amounting to $14.33 per share, and no debt on its balance sheet.
The have invested 15% of sales in R&D during the past few years. The company pays a sizeable dividend
that currently offers a yield of 3.7% which acts to support the share price reduce volatility as evidenced
by the stock’s low Beta (0.74).
3|Page
Midtown Partners & Co. LLC.
BusinessBreakdown
Garmin Ltd. Revenue Mix
3,000,000
2,500,000
2,000,000
Marine
Aviation
1,500,000
Fitness
1,000,000
Outdoor
Automotive
500,000
0
2011A
2012A
2013E
2014E
Automotive
The automotive sector has been the main driver of Garmin’s business revenues in recent years. Garmin
is the worldwide leader in the PND industry, and they have increased market share in the last year. The
PND market has been declining at global rate of 20% since 2008 mainly due to the emergence of free
navigational software available on increasingly prevalent smart phones. Garmin expects the automotive
sector to be less than 50% of total revenue going forward. But the company continues to innovate and
has recently redesigned products for motorcyclists and truckers. Of course, they are looking to improve
their technology to offer incremental features like lane assist that offer greater utility than smart phonebased driving directions. Additionally, Garmin may benefit from a shift by operators like Verizon and
AT&T toward the elimination of unlimited data usage plans, which will help the appeal of Garmin’s
navigation products to consumers. Meanwhile, the growth in the OEM automotive market could help
offset the decline in the PND market, and its new partnerships with Suzuki and Volkswagen should help
stimulate revenue, though sales of new cars remains a mixed bag worldwide. In the United States, auto
sales have rebounded significantly within the last year. Last month, buyers purchased 1.5 million
vehicles, up 17% from a year ago. New auto sales are projected to reach 15.4 million in 2013- the
highest since 2007. Conversely, European demand for cars has been at an all-time low due to the
continuing weak economic climate. We estimate that Garmin has 42% market share globally, with 70%
share in North America and 35% in Europe. Garmin expects revenues from their automotive segment to
decline by 15-20% in the upcoming year.
Outdoor
Garmin provides hand held navigation technology for outdoor enthusiasts - providing a measure of
safety for hikers, hunters, and backpackers by better enabling them to track their position and exit from
remote locations. Garmin’s most successful product in this business segment is their Golf handheld GPS
and watches, which are strong holiday sellers. Their golf devices provide golfers with exact yardage to
greens, fairways, and hazards with club recommendations. The product has over 30,000 preloaded golf
4|Page
Michael Rindos, 212-939-6427
courses. Another high growth product line within this segment is their dog tracking devices. Although
this segment is a very niche category, Garmin’s products are extremely useful to the target market and
end users. This segment’s revenue has consistently been growing since 2010. Within the last year,
revenue has grown by 6%. The company expects revenues to increase between 5-10% in 2013, over last
year’s result.
Fitness
The fitness segment addresses a rapidly growing industry with many competitors such as Nike and
Adidas. Garmin has specific fitness watches for runners, bikers, and swimmers. The products provide
users key fitness metrics such as time, distance, pace, heart rate, and calories burned. Garmin’s software
called Garmin Connect links to the devices allowing the user to access data and analytics through their
smartphone or computer. This enables athletes an application to set goals and analyze their training
and performance. Garmin Connect also allows users to connect with other athletes through a social
media platform. The company continues to invest capital in research and development to improve these
products. The fitness watch industry has reached $1.07 billion, representing 50% growth over the last
year. Garmin’s fitness revenues have grown 8% year to date, and the company expects the segment to
grow between 5-10% annually. With such growing popularity, Garmin will have to keep innovating
within this market to keep up with major athletic retail companies like Nike.
Marine
Garmin’s marine products include handhelds, network products and multifunction displays, fixed-mount
GPS/chartplotter products, instruments, fishfinders, radar, autopilots, VHF radios, marine watches,
marine networking products, and sounder products. Garmin’s products help fishermen in a number of
ways, such as giving them tools to avoid dangerous weather conditions and improve efficiency in
catching fish. Garmin has relationships with some of the leading boat manufacturers. Garmin’s marine
products tend to have long life cycles. Their new products have been well received, and management
reports it has experienced strong shipments continuing into the third quarter. The Blue Chart Mobile
Application was an extremely successful service that Garmin introduced last year. In 2012, Garmin’s
operating profits decreased by 10% due to large increases R&D spending to upgrade their marine GPS
software. The company expects returns from these investments to materialize in the back half of 2013.
Revenues have remained steady and the company expects 5% revenue growth. The marine segment is
Garmin’s smallest business segment due to the limited market population.
Aviation
Garmin’s aviation product line includes GPS-enabled navigation, VHF communications
transmitters/receivers, multi-function displays, electronic flight instrumentation systems (EFIS),
automatic flight control systems, traffic advisory systems and traffic collision avoidance systems, terrain
awareness and warning systems, instrument landing system (ILS) receivers, surveillance products, audio
panels, cockpit datalink systems and more. They offer a range of avionics to leading General Aviation
aircraft manufacturers. With the exception of the automotive sector, Garmin has invested the greatest
amount of resources into the Aviation business segment. In 2012, they spent roughly $130 million in
research and development in this area. Last quarter they spent $36 million in research. The primary
driver has been the development of Automatic dependent surveillance-broadcast (ADS-B). ADS-B allows
air traffic controllers to route traffic more efficiently, reducing congestion, noise, emission and fuel
consumption. The United States will require a majority of aircraft to be equipped with some form of this
technology by 2020. Garmin estimates that by 2020, 200,000 aircrafts will need ADS-B adaptable
equipment. The company is quickly becoming the leader in educating pilots on transitioning to this new
technology. In fact, the company set up the “Garmin ADS-B Academy” which provides seminars and
5|Page
Midtown Partners & Co. LLC.
webinars to pilots about how to upgrade to the new system. Garmin currently has 52 aviation OEM
partnerships and expects that number to grow significantly in 2013 and 2014. The aviation business
segment contributed 16% revenue grow the last year. Garmin expects between 10-15% revenue growth
in 2013 and 2014.
Personal Navigation Devices
Nüvi Model
The nüvi is Garmin’s most popular personal navigation device. In fiscal years 2012, 2011 and 2010, the
nüvi class of products represented approximately 43%, 48%, and 54% of Garmin’s total consolidated
revenues, respectively. There are 34 different models with each offering different features such as wide
screen display, integrated traffic receiver for traffic avoidance, spoken street names, speed limit
indication, Bluetooth, 3-D buildings and terrain, active lane guidance, and a custom GPS voice. The 2013
models include Garmin Real Directions™ which guides drivers by telling them to turn at recognizable
landmarks, buildings, stop signs and traffic lights, and Active Lane Guidance which features voice
prompts and visual lane animation. Garmin has 3 categories for their nüvi models: the Essential series,
the Advanced series, and Prestige series. The advanced and prestige series are more expensive and
include more advanced features. The nüvi products are priced from $100-$350.
Zumo Model
The zumo models are motorcycle-specific navigators with features including a glove-friendly touch
screen with high bright sunlight-readable display, motorcycle mount, vibration-tested design, and
Bluetooth wireless technology. A microSD™ (secure digital) card slot allows riders to share their favorite
places and rides with fellow zūmo riders. The zūmo 660LM and 665LM feature 3-D building view, lane
assist with junction view, a digital fuel gauge and lifetime map updates. The 665LM includes an antenna
for XM Satellite Radio®, XM NavWeather® and XM NavTraffic® (subscription is required for XM content).
Dēzl Model
The dēzl navigators are designed exclusively for the trucking industry. The dēzl features a large display,
a built-in loudspeaker, and offers a number of additional user-friendly features including trucker specific
points of interest, hours, fuel, and mileage logging. In August 2012 Garmin announced the dēzl 760LMT,
which is Garmin’s first trucking navigator with a seven-inch display and a new Active Lane Guidance
feature that helps trucks, navigate intersections and exits. The dēzl 760LMT also includes lifetime map
and traffic updates, and has the ability to receive real-time information, such as fuel prices, traffic
camera images and weather through Smartphone Link.
6|Page
Michael Rindos, 212-939-6427
K2 Infotainment Platform
Garmin recently announced the K2 Infotainment Platform (shown below) that will be sold to their OEM
partners. This offers features like multiple digital displays, on and off voice recognition, Smartphone
integration, and embedded 4G connectivity. The 3-D display on the 12-inch screen looks extremely
realistic. When Bluetooth paired with a Smartphone, K2 will have notifications of text messages and
emails. The user can have the voice command read the actual text message or email aloud to make the
driving experience safer. K2 will make the in-car experience extremely convenient and is expected to
produce large growth opportunities in the future. Garmin has yet to announce when K2 will be in
production but has shown off the technology at numerous car shows.
7|Page
Midtown Partners & Co. LLC.
Outdoor Segment Products
Fēnix™
The fēnix™ is Garmin’s first GPS watch for outdoorsmen, such as mountaineers, hikers, cyclists, hunters,
and backpackers. The watch provides users with information on heading, elevation, heart rate, speed
and weather changes. The watch lets you create routes, record up 1,000 waypoints and record GPS
breadcrumb trails. It has wireless capability to share routes, tracks, and waypoints with other devices.
The watch is currently priced at $399.99.
Approach® Model
The Approach® model is the most popular brand within the outdoor segment. This golf GPS software
offers watches and handheld devices that provide yardage, club selection, and wind speed. The newest
device is the Approach S4, which is preloaded with 30,000 individual golf courses, provides stat analysis,
and customizes your distances to putting greens and hazards. The Approach products are priced
between $150-$350, while competitive products provide similar service for a monthly fee, which may
cost users more over the long run.
Alpha™ 100/TT™10
Alpha combines proven Garmin GPS dog tracking technology with Tri-Tronics® electronic dog training.
The integrated handheld system allows users to track and train their dogs in the field from a range of up
to 9 miles, delivering their exact position as often as every 2.5 seconds. A single Alpha 100 can track up
to 20 dogs or fellow hunters when using either additional Alpha 100 handhelds or TT 10 track and train
dog devices. The technology has become essential equipment for police forces and SAR (search and
rescue) teams to track their highly trained canines.
Garmin Tactix
The Garmin Tactix is the company’s newly introduced GPS watch targeted for battlefield-trained agents.
The watch is available for sale at the end of 2013. The new watch is designed and inspired by the
requirements of law enforcement and police special operations. The product provides an altimeter,
barometer, and 3-axis compass. It has a stealth, matte black design with a curved lens and green
backlight, so it won't flare out with night vision devices or compromises the user's position. Tactix can
withstand even the most extreme elements and situations, but is sleek enough to be worn as an
everyday timepiece. The watch has preloaded tide data and Jumpmaster software, which are both
important features to military operators. Tactix boasts a comprehensive navigational toolset that allows
users to plan trips, create routes; record waypoints (up to 1,000) such as rally points, landing zones or
potential campsites. Users can record GPS breadcrumb trails on the move, can navigate to coordinates,
along a track or route, towards waypoints, geocaches or along any other selected bearing. A navigation
8|Page
Michael Rindos, 212-939-6427
arrow provides clear directional guidance, and the TracBack® function can guide users back along a
previously recorded tracklog. The watch retails at $449.99.
Fitness Segment Products
Forerunner®
The Forerunner is a fitness watch that is compact, lightweight, and extremely useful for assisting athletes
in their training. There are seven different models of the Forerunner. Each of them provide information
on time, speed, distance, pace, and performance. All models allow runners to upload information to
Garmin Connect where they can store, share, and analyze their workout data. Garmin’s different models
appeal to different experience levels of runners. Garmin recently came out with the Forerunner 10
(shown below) that is designed for beginning to intermediate runners. It provides the most essential
data such as time, distance, and pace while also identifying personal records. The Forerunner 910XT is
designed specifically for triathletes and it is an all-in-one GPS-enabled device that provides detailed
swim metrics and tracks distance, speed/pace, elevation and heart rate for running and cycling. The
different watches are priced between $100-$400.
Garmin Swim
Garmin Swim is similar to the Forerunner watch but customized for swimmers. Garmin Swim tracks
lengths, strokes, and distance. The watch is lightweight and designed to move through the water. The
watch links to Garmin Connect where the user can download swimming data into their computer to
analyze their workouts. The product is priced at $149.99.
Marine Segment Products
Marine Chartplotters
Garmin currently has 50 different chartplotters for all types of boats. Most of Garmin’s customers within
this segment and product line are their OEM partners. Garmin has 45 OEM partners in their marine
business segment. Their chartplotters serve numerous functions such as depth contour maps, weather
tracking, autopilot, coastal and lake maps, and satellite radio. Garmin has 5 different series of
chartplotters. Each series is designed for the size and functionality of the boat and end user. The
GPSMAP 8000 is the most advanced and expensive series designed for large boats. It comes with a 12 or
15-inch touch screen display. It’s connected wirelessly so the user can control his/her boat anywhere
within the boat. It integrates autopilot, sonar technologies, connectivity, apps, engine data, and multimedia.
9|Page
Midtown Partners & Co. LLC.
Other Marine Products
Garmin provides any type of marine/boat product a mariner could desire. These products include
radars, fishfinders, cameras, marine GPS watches, communication devices, transducers, and sounders.
Garmin sell’s its marine maps named BlueChart g2 by regional location. These maps are priced between
$25-$500. The maps provide auto guidance, resolution satelitte imagery, and above/below 3-D
perspectives.
Aviation Segment Products
All of Garmin’s aviation products are sold to their OEM partners. The company has 52 OEM partners.
Garmin sells flight decks, avionics, pilot GPS watches, and portable GPS’s. The flight decks are the key
revenue drivers of this business segment. All help the pilot fly safer and more efficiently. The company
provides seminars to train pilots on how to use the equipment as well. Garmin’s aviation products are
extremely profitable. With a 70% gross margin, this business segment produces the highest gross margin
percentage out of any segment within their company.
Product Development
Garmin created the consumer GPS category and continues to develop new products to expand its
presence. Below, we briefly discuss some areas of focus for the company.
Automotive OEM
Garmin announced the K2 Infotainment Platform- a digital cockpit with digital displays, voice control,
and Smartphone integration. Garmin announced a partnership with Mercedes-Benz, providing Garminbranded navigation in most models beginning in 2014 through 2017. Garmin continues to provide
navigation software for major automotive companies such as Chrysler, Dodge, Jeep, and Volkswagen.
They plan on expanding on niche opportunities in fleet management, over the road trucking, and
motorcycles. Growth in the automotive OEM business is somewhat dependent on a global economic
recovery to stimulate new car sales and the upcharge for these premium feature sets.
Smart Watches
The smart watch market has boomed within the last year and Garmin is one of the leaders in the
industry. Garmin has customized GPS watches for outdoorsmen, fitness lovers, fishermen, golfers, and
military officers. The Forerunner 10 has been a major success targeting beginning to intermediate level
runners. Garmin’s newest product is the Garmin Tactix, specifically designed for military and police force
training. All Garmin watches link to Garmin Connect software where the end user can analyze their
activity to improve performance.
10 | P a g e
Michael Rindos, 212-939-6427
We believe Garmin has demonstrated over the years that it is adept and defining and dominating the
slices of the consumer electronics industry that it serves.
Aviation
Garmin expects the aviation business segment to grow 15-20% in 2013 and 2014. The company expects
to be the leader in the transition to Automatic dependent surveillance-broadcast (ADS-B). The U.S
government is requiring most aircrafts to have ADS-B licensed equipment by 2020. This business
segment is extremely profitable with gross margins of 70%. Garmin continues to develop integrated
flight decks for business jets. According to the General Aviation Manufacturers Association (GAMA), 283
business jets were manufactured in the first half of 2013 compared to 295 in 2012. We view this small
decline insignificant. Garmin’s G5000 can range from $400,000 to $500,000 per cockpit, suggesting large
market opportunities. We believe that the company has significant room to grow if it can increase its
penetration into larger business jet avionics, and if that segment catches a tailwind from increased
economic output worldwide.
11 | P a g e
Midtown Partners & Co. LLC.
Financials
Recent Results
For the 13 week period ended September 28, 2013, the company reported net sales of $643.6 million –
a decrease of 4% compared to the same period last year. The biggest driver of the decrease was the
automotive/mobile sector that witnessed a sales decline of 16%.; this group accounted for 50% of net
sales and its decline more than offset notable increases in sales of fitness (+25) and aviation (+15%)
products that are growing briskly off a substantially smaller base. Gross margin improved to 55% - a
gain of two percentage points year over year, while operating margins held steady at 24% of sales in
both periods. Garmin posted EPS (excluding one-time events and the effects of currency exchange) of
$0.69 versus $0.74 in the year-ago period.
Financial Outlook
Garmin increased its full year for pro forma EPS estimate to a range of $2.40-$2.45 from $2.30-$2.40
previously. It held its sales forecast steady for the year at between $2.5-$2.6 billion. The table below
illustrates how our estimates compare to company guidance.
Revenue
Gross Margin
Operating Income
Operating Margin
Tax Rate
EPS (Pro Forma)
Midtown Estimate
$2.58 billion
54%
$537 million
20.8%
16%
$2.46
Updated Guidance
$2.5 -$2.6 billion
53% - 54%
~ $530 million
~21%
16%
$2.40 - $2.45
Prior Guidance
$2.5 -$2.6 billion
53% - 54%
~ $500 million
~20%
15%
$2.30 - $2.40
Balance Sheet
The company has a strong balance sheet, with $2.8 billion in cash and marketable securities ($14.33 on a
per share basis), and no debt. Its current ratio stands at 2.5 times. Tangible book value per share stands
at $17.09.
High Dividend Yield
Garmin has done an excellent job of returning cash to shareholders through a consistently growing
dividend. The current dividend yield is about 3.7%. The dividend per share has increased from $1.50 in
June 2010 to $1.80 in 2013. We believe the company will continue to increase the dividend in
proportion to its increasing cash flow. Garmin currently pays out roughly 50% of its free cash flow.
12 | P a g e
Michael Rindos, 212-939-6427
Competition
The market for navigation, communications, and information products is highly competitive. Garmin has
a number of different competitors in its various business segments. The principal competitive factors
impacting the market for its products are design, functionality, quality, customer service, brand, price,
and availability.
TomTom N.V. and MiTAC Digital Corporation are the two biggest competitors in the portable
automotive sector. Garmin holds majority of the market share in North America, while TomTom owns
majority of the market in Europe. There is little difference in the functionality and pricing of navigational
products between the companies, in our view. Garmin exceeds TomTom in size because Garmin has
wider range of products in different niche markets. TomTom doesn’t provide products in the marine and
aviation business. TomTom has slightly higher application revenue than Garmin. Overall, Garmin is the
leader in the worldwide market for personal navigation devices.
The biggest threat to Garmin in the automotive sector is increasing popularity of smartphone based
navigation. All smartphones offer free GPS software provided by Google and Apple. Google Maps, which
is tightly integrated with iOS and Android, is a convenient and free choice for consumers. Google’s
recent purchase of the Israeli map service company Waze illustrates the company’s commitment to
expanding its use of this technology. The company already has 47 million users and will help improve
Google’s PND technology in traffic avoidance and customized navigation points. And while some are
concerned that using a handheld phone while driving might be dangerous or unsafe, the increasing
usage of car mounts and Bluetooth technology help to overcome these obstacles. Based on this
continuing pressure, Garmin projects a 15-20% decline in sales in its automotive segment.
The fitness watch industry has been growing rapidly at 50% within the last year. Garmin’s biggest
competition comes from Nike, Timex, Motorola, and Polar. Companies such as Adidas and Apple are
expected to come out with new products and enter the market this holiday season. And there are a
number of start-up companies including Leikr, Pebble, Basis, I’m Here, and Bia Sport poised to enter the
market as well. The key factors affecting market position will be price and new features. Garmin has
products for all categories of athletes at different price ranges. For instance, the Forerunner 910XT is
priced at $449.99 and combines services for runners, bikers, and cyclists. The Forerunner 10, which is
priced at $129.99, provides the essential services for runners. Low cost watches that connect to an easy
to use application are forecasted to take a significant of chunk of the market. The majority of consumers
aren’t triathlon athletes, but instead are avid runners who want to improve their performance with a
lightweight watch that connects to their computer and phone. It will be very important to Garmin to
improve the Forerunner 10 to compete with Nike who has such a strong brand presence in the athletic
industry. Nike has two types of fitness watches. One is their Nike Fuelband, which remains extremely
popular. The other watch they developed with TomTom called the Nike+ SportsWatch. The watch is
priced slightly higher than its competitors mainly due to the Nike branding. Competition is increasing
rapidly in the fitness watch industry therefore the company doesn’t expect this product line to grow at a
higher rate.
In the aviation sector, Honeywell, Inc is Garmin’s biggest competitor. Honeywell is a main supplier to
Boeing, which is the largest aircraft manufacturer in the world. Honeywell provides more aviation
products such as air traffic management systems, performance based navigation, auxiliary power units,
13 | P a g e
Midtown Partners & Co. LLC.
cockpit displays, and numerous safety products. Honeywell reaches commercial airlines, business
airlines, defense, helicopters, and space markets. Honeywell specializes in the aviation business while
the aviation segment is a small portion of Garmin’s business. The key product on which the two
companies compete in is the flight deck. Honeywell and Rockwell Collins are the industry leaders in this
segment. And once pilots have become comfortable using certain interfaces, they remain sticky. Garmin
targets the personal or business jet market and finds niche categories to provide services.
Risks
Financial results are highly dependent on the automotive/mobile segment, which represented
approximately 55% of Garmin’s revenues in 2012. As noted, we forecast this segment to further decline
in 2013. Additionally, the automotive OEM business is cyclical and has been weak due lackluster car
sales resulting from weak economic growth around the world.
Additionally, the demand for personal navigation devices (PNDs) has been reduced by replacement
technologies (typically smartphones) and factory-installed systems in new autos. Navigation systems are
also becoming more prevalent as optional equipment on new automobiles. We expect the increased this
trend to continue to weigh on PND sales going forward.
Quarterly financial statements will reflect fluctuations in foreign currency translation. In the past
foreign currency gains or losses has affected the earnings per share significantly. The currencies that
create a majority of the Company’s exchange rate exposure are the Taiwan Dollar, Euro, and British
Pound Sterling. Garmin Corporation, headquartered in Sijhih, Taiwan, uses the local currency as the
functional currency. The company translates all assets and liabilities at year-end exchange rates and
income and expense accounts at average rates during the year. In order to minimize the effect of the
currency exchange fluctuations on net assets, the company has elected to retain most of the Taiwan
subsidiary’s cash and investments in marketable securities denominated in U.S. dollars.
Many of Garmin’s products rely on the Global Positioning System. The Global Positioning System (GPS)
is a satellite-based navigation and positioning system consisting of a constellation of orbiting satellites.
The satellites and their ground control and monitoring stations are maintained and operated by the
United States Department of Defense. The Department of Defense does not currently charge users for
access to the satellite signals. If a user fee were imposed, it could have a negative effect on Garmin’s
financial position. These satellites and their ground support systems are complex electronic systems
subject to electronic and mechanical failures and possible sabotage. The satellites were originally
designed to have lives of 7.5 years and are subject to damage by the hostile space environment in which
they operate. However, of the current deployment of satellites in place, some have been operating for
more than 12 years.
Success in Garmin’s growth segments are critical. With the decline in the automotive sector, Garmin
expects aviation to grow exponentially to help offset that loss. The automotive sector could be in
steeper decline then what the company expects. Garmin’s success will depend on the implementation of
the ADS-B (Automatic dependent surveillance-broadcast). A delay in the mandate by the Government
will hurt Garmin’s sector performance. The company expects growth in automotive OEM partnerships.
14 | P a g e
Michael Rindos, 212-939-6427
The company continues to invest in research and development within this sector. Garmin expects these
projects to produce meaningful growth in years 2013 and 2014.
Competition in the Fitness Segment is increasing rapidly. Within the last year, the fitness watch
industry has grown by 50%. We believe the growth rate and demand will fall in the upcoming year.
Companies specializing in sports retail such as Nike and Adidas could take a significant portion of
Garmin’s market share especially given their mindshare among athletes.
Management
Dr. Min H. Kao, age 64, has served as Executive Chairman of Garmin Ltd. since January 2013 and was
previously Chairman of Garmin Ltd. from August 2004 to December 2012 and Co-Chairman of Garmin
Ltd. from August 2000 to August 2004. He served as Chief Executive Officer of Garmin Ltd. from August
2002 to December 2012 and previously served as Co-Chief Executive Officer from August 2000 to August
2002. Dr. Kao served as a director and officer of various subsidiaries of the Company from August 1990
until January 2013. Dr. Kao holds Ph.D. and MS degrees in Electrical Engineering from the University of
Tennessee and a BS degree in Electrical Engineering from National Taiwan University.
Clifton A. Pemble, age 47, has served as a director of Garmin Ltd. since August 2004. He has served as
President and Chief Executive Officer of Garmin Ltd. since January 2013. Previously, he served as
President and Chief Operating Officer of Garmin Ltd. from October 2007 to December 2012. Previously,
he was Vice President, Engineering of Garmin International, Inc. from 2005 to October 2007, Director of
Engineering of Garmin International, Inc. from 2003 to 2005, and Software Engineering Manager of
Garmin International, Inc. from 1995 to 2002 and a Software Engineer with Garmin International, Inc.
from 1989 to 1995. Mr. Pemble has served as a director and officer of various Garmin subsidiaries since
August 2003. Mr. Pemble holds BA degrees in Mathematics and Computer Science from MidAmerica
Nazarene University.
Kevin S. Rauckman, age 50, has served as Chief Financial Officer and Treasurer of Garmin Ltd. since
August 2000. He previously served as Director of Finance and Treasurer of Garmin International, Inc.
since January 1999 and has served as a director and officer of various subsidiaries of the Company since
April 2001. Mr. Rauckman holds BS and MBA degrees in Business from the University of Kansas.
•
I would like to extend a special “thanks” to Justin Zeitchik for his contribution to this report.
15 | P a g e
Midtown Partners & Co. LLC.
Garmin Ltd. Income Statement
Income Statement
2010A
2011A
Mar 31A
Jun 30A
Sep 30A
Dec 31A
2012A
Mar 31A
Jun 30A
Sep 30A
Dec 31E
2013E
2014E
1,668,939
1,590,598
279,269
392,124
384,393
436,654
1,492,440
252,589
344,701
$322,520
$349,323
$1,269,133
$1,142,220
Outdoor
319,119
363,223
77,162
100,496
105,572
118,517
401,747
76,165
106,856
$101,350
$116,553
$400,924
$416,960
Fitness
240,473
298,163
71,251
81,812
64,788
103,937
321,788
72,437
84,216
$83,459
$116,843
$356,955
$385,511
Aviaton
262,520
284,855
72,887
75,932
72,857
69,888
291,564
80,470
88,042
$81,007
$76,957
$326,476
$375,447
Marine
198,860
221,730
56,064
67,790
44,766
39,516
208,136
50,296
72,748
$55,301
$48,665
$227,010
$238,360
Total Revenues
$2,689,911
$2,758,569
$556,633
$718,154
$672,376
$2,558,499
3%
10%
7%
1%
$1,338,592
$283,795
$421,813
$359,055
$ in thousands, except per share
Automotive
Revenue Growth
Gross profit
Gross Margin
$1,346,374
$768,512
$2,715,675
$531,957
$696,563
$643,637
$708,340
$2,580,497
-16%
-2%
-4%
-3%
-4%
-8%
-5%
-1%
$373,817
$1,438,480
$276,133
$383,640
$352,889
$383,032
$1,399,654
$1,428,045
50%
49%
51%
59%
53%
53%
52%
55%
55%
54%
54%
56%
Advertising expense
(144,613)
(145,024)
(23,591)
(38,258)
(30,102)
(46,806)
(138,757)
(22,249)
(29,483)
(26,251)
(42,500)
(120,483)
(153,510)
Selling, general and administrative expenses
(152,841)
(246,682)
(54,873)
(65,206)
(66,391)
(63,579)
(250,049)
(58,940)
(62,471)
(63,642)
(70,000)
(255,053)
(245,000)
Research and development expense
(277,261)
(298,584)
(79,719)
(80,303)
(82,489)
(83,262)
(325,773)
(87,689)
(96,232)
(88,427)
(90,000)
(362,348)
(340,000)
Total operating expense
(574,715)
(690,290)
(158,183)
(183,767)
(178,982)
(193,647)
(714,579)
(168,878)
(188,186)
(178,320)
(202,500)
(737,884)
(738,510)
$771,659
$648,302
$125,612
$238,046
$180,073
$180,170
$723,901
$107,255
$195,454
$174,569
$180,531
$661,770
$689,535
29%
24%
23%
33%
27%
23%
27%
20%
28%
27%
25%
26%
27%
Depreciation
(53,487)
(54,610)
(13,790)
(13,741)
(12,494)
(12,607)
(52,632)
(12,619)
(12,721)
(11,140)
(12,000)
(52,340)
(52,340)
Amortization
(41,164)
(39,925)
(11,609)
(12,100)
(14,930)
(37,835)
(9,272)
(7,307)
(7,050)
(7,200)
(36,579)
(36,579)
Non Cash Compensation
(40,332)
(40,212)
(9,844)
(8,199)
(8,321)
(2,910)
(29,274)
(5,438)
(5,540)
(4,630)
(5,500)
(36,579)
(36,579)
24,979
32,812
9,671
8,620
7,987
35,108
8,898
8,179
8,435
8,000
33,512
32,000
0
0
0
0
0
0
0
0
0
0
0
0
3,994
9,682
1,541
2,581
942
5,282
1,158
1,069
1,438
1,500
5,165
6,000
EBITDA
EBITDA Margin
Interest income
Interest expense
Other
Pretax Income
Taxes
Effective Tax Rate
$665,649
(7,331)
$556,049
(63,265)
$101,581
(12,952)
$215,207
(22,338)
804
$168,991
(21,407)
49%
8,830
0
218
$158,771
(26,260)
$644,550
(82,957)
$89,982
(10,475)
$179,134
(29,563)
$161,622
(25,441)
$165,331
(26,453)
$574,949
(91,932)
$602,037
(100,086)
-1%
-11%
-13%
-10%
-13%
-17%
-13%
-12%
-17%
-16%
-16%
-16%
-17%
Net income
$658,318
$492,784
$88,629
$192,869
$147,584
$132,511
$561,593
$79,507
$149,571
$136,181
$138,878
$483,017
$501,951
Net Margin
24%
18%
16%
27%
22%
17%
21%
15%
21%
21%
20%
19%
20%
Shares: Avg. Basic
196,979
194,105
194,742
194,849
194,912
194,909
194,909
195,630
195,570
195,325
195,500
195,500
196,000
Shares: Avg. Fully Diluted
198,009
194,894
195,673
196,261
196,161
196,213
196,213
196,457
196,261
196,300
196,500
196,500
197,000
Recurring EPS (Basic)
$3.34
$2.54
$0.46
$0.99
$0.76
$0.68
$2.88
$0.41
$0.76
$0.70
$0.71
$2.47
$2.56
Recurring EPS (Fully Diluted)
$3.32
$2.53
$0.45
$0.98
$0.75
$0.68
$2.86
$0.40
$0.76
$0.69
$0.71
$2.46
$2.55
(74,383)
(12,100)
(1,735)
(6,965)
(5,492)
(3,254)
(17,389)
NON RECURRING ITEMS
Foreign currency Gains/(Losses)
Tax benefit
(7,377)
22,920
16,536
114,605
name these lines as necessary
(692)
14,851
52,180
-
-
68,716
-
-
-
Loss on extinguishmen of debt
-
-
Loss on future equity issuance
-
-
-
-
83,567
-
Derivative gain/loss
Total Non Recurring Items +/-
40,222
(12,100)
(1,735)
(6,965)
(5,492)
(3,254)
(17,389)
9,159
22,920
51,488
-
-$0.38
-$0.06
-$0.01
-$0.04
-$0.03
-$0.02
-$0.09
$0.05
$0.12
$0.26
$0.00
$0.43
$0.00
$2.95
$2.47
$0.44
$0.95
$0.72
$0.66
$2.77
$0.45
$0.88
$0.96
$0.71
$2.88
$2.55
Non Recurring Tax Impact
After-Tax Non Recur Items P/S
Reported Earnings Per Share (FD)
Source: Company Reports and Midtown Partners & Co. LLC estimates
16 | P a g e
Michael Rindos, 212-939-6427
Midtown Partners & Co. LLC - Investment Ratings
Rating
Rating Description
Strong
Buy
We expect these shares to increase in value by at
least 20% over the next 12 months.
Buy
We expect these shares to increase in value by at
least 10% over the next 12 months
Neutral
We expect these shares to remain within a range
+/- 10% within the next 12 months
Sell
We expect these shares to decrease in value by
at least 10% over the next 12 months
Not
Rated
The ratings for the subject company have been
temporarily suspended by Midtown Partners &
Co. LLC
Number of
Companies
Covered
5
Midtown Partners & Co.
LLC Rating Distribution
Percentage
71%
Investment
Banking Clients
0
Percent
Banking
Clients
0%
2
29%
0
0%
Midtown Partners & Co. LLC - Risk Ratings
Rating
Low
Moderate
High
Speculative
Rating Description
Financial results of companies with a “Low” risk rating have a high level of predictability and / or their share prices are subject to
low volatility as measured by Beta
Financial results of companies with a “Moderate” risk rating have a moderate level of predictability and / or their share prices
are subject to moderate volatility as measured by Beta.
Financial results of companies with a “High” risk rating have a low level of predictability and / or their share prices are subject to
high volatility as measured by Beta.
Financial results of companies with a “Speculative” risk rating have a very low level of predictability and / or their share prices
are subject to high volatility as measured by Beta. Investments in these shares carry very high risk.
Important Notices and Disclosures
Midtown Partners & Co. LLC, a FINRA member headquartered at 380 Madison Avenue, 22nd Floor, New York, New York 10017 (USA) has not
received investment banking or other remuneration from Garmin Ltd. over the past 12 months. Garmin Ltd. is not currently an investment
banking client of Midtown Partners & Co. LLC. Midtown Partners & Co. LLC expects to seek investment banking or other compensation from
Garmin Ltd. within the next three months. Midtown Partners & Co. LLC does not make a market in the common shares of Garmin Ltd. Midtown
Partners & Co. LLC, its officers, director, partners, employees and/or affiliates may from time to time have a long or short position in publicly or
privately issued securities (or derivative thereof) of companies mentioned in this publication and may buy or sell such securities for their own
account or related accounts at any time.
Michael Rindos, the analyst primarily responsible for the creation of this report, has not received any compensation of any kind from Garmin
Ltd. over the past 12 months and expects to receive no such compensation over the next 90 days. No part of Mr. Rindos’ compensation was, is
or will be directly or indirectly related to the specific recommendations or views contained in this report. A portion of Mr. Rindos’
compensation from Midtown Partners & Co. LLC, Inc. is based on the overall activities of Midtown Partners & Co. LLC’s investment banking unit
without consideration for any specific investment banking transaction(s). Neither Mr. Rindos nor any member of his household a) has any direct
or indirect interest in any debt or equity instrument (or derivative thereof) issued by Garmin Ltd. or b) is an officer, director, or advisory board
member for Garmin Ltd. As of the date of this publication, Mr. Rindos confirms that all opinions he expresses in this report regarding the
subject securities and issuer accurately reflect his current personal views.
All statements or opinions contained herein that include the words "we," "us", or "our" are solely the responsibility of Midtown Partners & Co.
LLC and do not necessarily reflect statements or opinions expressed by any person or party affiliated with Garmin Ltd. Any opinions expressed
herein are subject to change without notice. All information provided herein is based on public and/or non-public information believed to be
accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to
the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any
investment decision regarding the securities mentioned herein should be made by each reader of this publication based on its own appraisal of
the implications and risks of such a decision. This publication is intended for information purposes only and shall not constitute an offer to sell
or the solicitation of an offer to buy any securities mentioned herein, nor shall there be any sale of these securities in any state or domicile in
which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or
domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the
date of this publication, subject to change without further notice. Neither Midtown Partners & Co. LLC nor Mr. Rindos undertake to update or
amend any information contained herein.
In addition to specific risks outlined in this publication, the company covered in this report may from time to time have low liquidity in the
trading of its publicly–traded shares, have a short operating history, be subject to significant changes in market conditions, have substantial
insider holdings of its shares, rely upon a small number of key employees, and/or be much more volatile in its financial performance and share
price movements than the majority of stocks traded on US and other major world stock exchanges.
Additional information on the securities mentioned herein is available to Midtown Partners & Co. LLC clients on request by contacting Michael
Rindos at the e-mail address indicated on the cover page of this report or mailing address and phone number indicated below.
Midtown Partners & Co. LLC. •380 Madison Avenue • 22nd Floor • New York • NY (USA) • 10017 • Phone: (212) 939-6430
17 | P a g e
Midtown Partners & Co. LLC.