GRMN: Fitness And Wearables Momentum Will Drive Resilience Amid Macroeconomic Uncertainty

Key Takeaways

• Garmin's premium services and advanced wearables boost revenue, enhancing margins in both Fitness and service segments due to high demand.
  
• New aviation products, and expanding foreign markets, drive growth across Aviation and international segments, improving revenues and mitigating trade risks.
  
• Rising operational expenses and market challenges in Marine and Outdoor could impact Garmin's revenue growth and compress margins amidst global trade and currency fluctuations.

Catalysts

Designs, develops, manufactures, markets, and distributes a range of wireless devices worldwide.

• The launch of the Garmin Connect+ premium service, which offers AI-based health and fitness insights, is likely to boost subscription-based revenue growth and improve overall margins through higher-margin services.
  
• The new vívoactive 6 smartwatch release, with advanced features like an AMOLED display and enhanced sports apps, suggests potential revenue growth in the Fitness segment, supported by strong demand for advanced wearables.
  
• The introduction of the new PC-12 Pro and PC-7 MKX aircraft, featuring Garmin's G3000 Prime flight deck, indicates solid growth prospects for the Aviation segment, potentially boosting revenue and operating margins through high-value product deliveries.
  
• Strengthening foreign markets, with significant revenue contribution from EMEA (23% growth) and APAC (9% growth), support overall revenue growth and mitigate trade risks, with favorable foreign currency exchange likely improving margins.
  
• Diversified product launches in the Outdoor segment, including the Instinct 3 Adventure watch series, are set to drive future revenue growth, capitalizing on Garmin's strong brand and product innovation in high-demand areas.

Garmin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Garmin's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.2% today to 21.5% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $9.58) by about September 2028, up from $1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.2x on those 2028 earnings, down from 29.3x today. This future PE is greater than the current PE for the US Consumer Durables industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Garmin Future Earnings Per Share Growth

Risks

• The global trade environment's shifting policies, including increased tariffs on products manufactured outside the U.S., could increase costs and affect Garmin's net margins if not offset by currency benefits.
  
• The Marine segment saw a revenue decrease primarily due to promotion timing and continued market softness, which could lead to flat revenue growth and negatively affect earnings.
  
• Economic uncertainty and potential reduced demand for certain products in the Outdoor segment could moderate growth, potentially impacting revenue and net margins.
  
• Operating expenses, including rising R&D and SG&A costs, grew by 10%, which could compress operating margins if revenue growth doesn’t keep pace.
  
• Increased focus on foreign currency fluctuations due to a significant portion of revenue generated in non-U.S. dollar currencies could impact revenue unpredictably if the U.S. dollar strengthens.

Valuation

• The analysts have a consensus price target of $213.833 for Garmin based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $285.0, and the most bearish reporting a price target of just $167.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.5 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of $238.5, the analyst price target of $213.83 is 11.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.