We think Garmin has the potential to provide a total return of between 20-30% over the next year with relatively low downside and a significant current income component. As such, we think Garmin is a long.
Why is Garmin a Long
The stock is very cheap. Garmin's shares are currently trading at an ex-net cash PE of around 10x.
The stock yields around 5% currently. On June 3, 2011, shareholders approved a $2.00 cash dividend per share. $0.80 of that dividend was paid on June 30th and the remaining $1.20 will be paid by March 30, 2012. While this is not a regular dividend, the company has been paying dividends for years and given its significant cash balance and cash flow generation is likely to continue to pay substantial dividends. The dividend prior to the $2.00 dividend was $1.50. If we assume Garmin goes back to the $1.50 dividend level the share would be yielding around 4.6%. If Garmin pays $2.00 again, the shares would yield 6.2%. Either way a fairly decent yield.
Growth from Non-PND businesses. If you remove the Automotive/Mobile business, the rest of Garmin is growing top line at about 13%. These businesses will probably do around $1.75 in after-tax earnings this year. Put a 15x multiple on these business and that gets you to about $26 per share in value for the non-PND businesses.
We can get to $40 per share in value. Assuming the Automotive/Mobile business is worth $1 per share, which is probably fair given that zero is too draconian as the business is still profitable and has a chance at growth via OEM sales, if you add the $26 per share we calculated above you get to $27 in value before cash. Add in $13 per share in cash (which includes the current dividend payable) you get to $40 per share in value. This is about 23% higher than the current share price. Add in a $0.75 cent dividend (which is what is was for years before the recent increases) and you get to a total return of over 25%. If the company maintains a dividend in the $2.00 range, then the total return will be approaching 30%.
Operating income growth in the non-PND business has flattened out in the first six momnths of 2011. This is largely due to increased spending to support growth. However, if this doesn't turn around then the story may not work.
If there is another US recession then all consumer product companies will likely suffer, including Garmin.
Garmin could do a foolish acquisition with their cash.