Garmin Ltd (GRMN)

Conclusion

Garmin Ltd designs and sells GPS-enabled products, including sports and smartwatches, outdoor and automotive navigation, aviation avionics and marine electronics. The shares trade at 291.80 USD, giving a market capitalisation of 56.2 billion USD.

The verdict is overvalued. Today's multiples sit above their own ten-year medians: the price-to-earnings ratio is 27.9 against a median of 21.1, and the price-to-free-cash-flow ratio is 40.1 against 29.5. The discounted cash flow gives 143.78 USD per share, while the fair value from historical multiples is 214.94 USD. The fair value band runs from 143.49 to 215.23 USD with a midpoint of 179.36 USD, a margin of safety of -38.5% at the current price. The reverse DCF implies growth of 17.5% a year, against revenue growth of 11.6% and free cash flow per share growth of 7.3% over five years.

The case rests on a balance sheet with net cash, a Z-score of 16.45 and return on invested capital of 27.1% against a WACC of 9.4%. The main weaknesses are the price multiples, which sit 32.4% above the ten-year median on earnings and 35.8% above it on free cash flow, and the fact that the implied growth of 17.5% is well above the delivered growth. A slowdown in the estimate revisions or in the growth of free cash flow per share would make the gap to the price harder to justify.

Financial health

Financial strength is green, held up by the net cash position and a high Altman Z-score. The current ratio is 3.05 and the quick ratio 1.63. Net debt to EBITDA is -0.83, which means net cash, and debt to equity is 0.02. The Altman Z-score is 16.45, in the safe zone; the model was designed for manufacturers, and Garmin manufactures its devices, so the reading applies. Insolvency risk: low, about 0.01% by the estimate of the Ohlson model over one to two years. Interest coverage is not available because the company does not report its interest expense.

Earnings quality

Earnings quality is green, supported by strong cash conversion and a low accrual ratio. Free cash flow conversion is 69.5% on a trailing basis and 78.3% over five years. The accrual ratio is 0.3%, and free cash flow after stock-based compensation is 1.23 billion USD. Share count has risen by 0.18% a year over five years, so there have been no net buybacks. The Piotroski score is 6 of 8 evaluable criteria passed. The Beneish M-score is not available. Garmin beat earnings expectations in 6 of the last 8 quarters, with an average surprise of 12.4%. Estimates are rising: the current-year estimate is up 7.3% over 90 days, with six upward revisions and none downward in the last 30 days.

Profitability

Profitability is green, with margins above their own ten-year medians. The gross margin is 61.1% against a median of 58.4%, and the operating margin is 28.8% against 23.9%. The net margin is 25.6% against 22.5%, and operating margin stability is 8.5%. Return on invested capital is 27.1% against a WACC of 9.4%, a spread that the company's own figures place at 17.7 percentage points, and it creates value. The five-year median ROIC is 23.0%. The DuPont split shows a net margin of 23.0%, an asset turnover of 0.66 and an equity multiplier of 1.23. Return on equity of 21.1% therefore comes mainly from margins, not from leverage.

Growth

Growth is green, with consistent revenue expansion. Revenue has compounded at 14.2% over three years, 11.6% over five years and 9.9% over ten years. Earnings per share compounded at 19.4% over three years, 10.7% over five years and 13.7% over ten years. Free cash flow per share grew 35.8% over three years, but only 7.3% over five years. Revenue rose in 9 of the last 10 years. Next year's earnings estimate implies growth of 6.3%, which is a neutral signal.

Valuation

Valuation is red, as the price stands well above the company's own history and the cash flow model. The price-to-earnings ratio is 27.9 against a ten-year median of 21.1, a premium of 32.4%. Enterprise value to EBITDA is 20.7 against 17.5, a premium of 17.9%, and the price-to-free-cash-flow ratio is 40.1 against 29.5, a premium of 35.8%. The discounted cash flow gives 143.78 USD per share at a discount rate of 9.4%, with 2.5% terminal growth. The fair value from historical multiples is 214.94 USD. The fair value band runs from 143.49 to 215.23 USD, with a midpoint of 179.36 USD and a margin of safety of -38.5% at a price of 291.80 USD. The reverse DCF implies growth of 17.5%, against 11.6% revenue growth over five years. The dividend yield is 1.3%, with a forward yield of 1.5%, and the payout on free cash flow is 53.6%. The fair value is an order of magnitude built on fixed assumptions, not a price target.

Risks

Higher-than-expected multiples are the main risk. If investors continue to pay premiums of 32.4% on earnings and 35.8% on free cash flow, the stock can stay above the fair value band. A fall in free cash flow conversion from 78.3% over five years, or in the 69.5% trailing figure, would weaken the earnings quality that supports the valuation. A slowdown in the 6.3% growth expected next year would make the implied growth of 17.5% harder to reach. The cost of debt is assumed rather than observed, and interest expense is not reported, so interest coverage is not available. The analysis has no debt maturity schedule and no revenue by segment, so it cannot test the exposure of individual product lines.