Thesis: GRMN is the anti-Kodak/Blackberry, following a reinvention after legacy personal GPS devices were disrupted by smartphones. GRMN is now highly diversified - Aerospace/Boats/Auto now represent almost half of GRMN’s rev, while the balance is Fitness/Outdoor. GRMN dominates niche markets - enjoys #1 share in 4 of 5 segments (ranging from 30-90+%). Despite excellent financial profile (58% GM, 25% EBIT margin) and a loyal customer base, GRMN is largely run like a private Company with woefully poor capital allocation / capital structure and an unclear focus on costs (especially SG&A). 

Why the Opportunity Exists: Stock is down almost 40% from peak on modest margin compression (supply chain and inflation) and COVID “winner” give back. Currently trading at a trough ~18x P/E multiple (15x ex-cash). See 50+% upside to $175/share on a 2-3 year basis, based on 22x '24 EPS, with incremental upside optionality on captial allocaiton, Activist, etc 

Activist Opportunity: Despite being a tremendously well-run Company, it’s largely run like a private Company

·         Board: 1 of 2 S&P 500 companies with only 6 Board Members. Half of the Board is either CEO or co-Founder, other Board members have limited business experience

·         Capital Allocation: $16/share of cash, no debt. Have not repurchased shares in several years. Previously, Swiss domicile and capital reserve (eventual taxation) was an impediment – it appears that buybacks do not count against capital reserve (risk removed from 10-K)

o   If GRMN exhausted current cash balance and ran the business at 1x leverage, could retire 35-40% of S/O in the next 5 years, while ROIC would move from ~20% to 80-90%. S&P 500 Co’s with ROIC >35% trade at an average multiple of 26x. GRMN taking on leverage is unlikely, but directionally underscores the potential

·         Cost Potential: R&D is the lifeline of the Company and high spend is necessary, but has outpaced rev growth over the past 5-10 years – gone from 11% of sales to 17%, despite 80% revenue growth in L10Y. SG&A is likely an opportunity – limited opex leverage in the L10Y despite 80% rev growth

·         AAPL Comparisons: GRMN GM 58% versus AAPL 42% (Hardware 35%), but GRMN spends 17% on both R&D and SG&A, relative to AAPL spending 6% on both = 6% EBIT margin gap versus AAPL. # of products, vertical integration, etc will drive some structural profit gaps versus AAPL, but a 22% opex gap is wide

o   In 2012, AAPL made the pivot to buybacks (had 20+% of mkt cap in net cash) – since then, stock has 8x’d and multiple has doubled, despite net income CAGR being only 10%. Starting point is higher for GRMN (18x versus 12x P/E), but parallels exist

·         Working Capital Opportunity: 100% vertical integration puts pressure on W/C, but inventory turnover has declined for 15 straight years and cash conversion cycle

Margin Improvement: During GRMN’s ~decade long rebirth, Auto OEM has been the blemish. Auto OEM losses in ’21 were $116m and are supposed to be comparable in ’22. The losses/investments have run ahead of their expectation. 2021/2022 negative EPS impact  from Auto OEM is >$0.50. Similar to other products/segments, GRMN aims to offer a superior product to competing/legacy solutions (building entire Infotainment/GPS console). Currently a 28% gross margin, but overwhelmed by heavy R&D (~double the GM). First Tier 1 supplier award from BMW  – have begun small shipments in BMW China with larger scale ramp in Europe/US planned for late ’22 and accelerating into ’23-’25, i.e. losses should significantly narrow and profitability should be reached in ’23 or ’24 = low DD % EPS accretion and 150-200 bps of EBIT margin potential (26+% EBIT margins). The potential exists for them to eventually exit the business after BMW project completes (versus taking on new business)

Company Overview: 5 segments. GRMNs’ Legacy PND product (Personal Navigation Device) was disrupted by Smartphones. 2007 Auto EBIT was $600m+ (2/3 of GRMN EBIT) - declined 90+% since then and now 3% of GRMN EBIT (and recently began growing again). GRMN is a highly innovative, R&D-led Company, that focusses on gaining high market share in several niche markets. GRMN is 100% vertically integrated – deemed a competitive advantage, but does burden FCF, e.g. cash conversion cycle is ~2x annually, while inventory turnover has declined every year since ‘07

Outdoor (26% of Rev, 39% of EBIT): 65% gross margin and 38% EBIT margin. 10 year rev and EBIT CAGRs of 14% and 12%, respectively. ~Half of segment is Fenix – high-end outdoor, fitness watch with limited competition – sold 7+m units sold since ’12 introduction at $600+/unit. 2022 should benefit from new Fenix model introduction, which is occurring 3 years since their last introduction (typically 2 year refresh cycles). Other outdoor products include  Outdoor Handhelds (two way satellite communications, mainly used in hiking, climbing), golf devices (GPS product lines, new analytic product line, Approach 10, sold out immediately) and dog walking/training devices

Fitness (31% of Rev and 28% of EBIT): 53% gross margin and 24% EBIT margin. 10 year rev and EBIT CAGRs of 18% and 13%, respectively. Running watches, including ForeRunner series – 100m+ running market in US/Europe, have 75% market share in top 6 marathons and >95% on high-end (e.g. Ironman). Have >80% in cycling products (computers, power meters and bike radars). Activity tracking smartwatches – seeing COVID tailwinds (health/wellness) – most competitive piece of GRMN’s portfolio – segment used to enjoy 33% EBIT margin segment, dropped to 20% in 2015 following Apple Watch introduction (currently 24% EBIT margin)

Aviation (14% of Rev and 16% of EBIT): 73% gross margin and 27% EBIT margin. 10 year rev and EBIT CAGRs of 9% and 10%, respectively. Avionics (OEM and aftermarket), primarily sold into business jet market. 50% market share with 70-80% share on light/medium planes (no Gulfstream). Recently received FAA authorization for Autoland product – autonomously locates nearest airport and lands plane in an emergency situation – no competing solution, may become FAA mandated

Marine (18% of Rev and 21% of EBIT): 57% gross margin and 29% EBIT margin. 10 year rev and EBIT CAGRs of 14% and 17%, respectively. #1 player in Boat GPS market (30+% share). Originally, GRMN produced more commoditized GPS products – 2013-2015 EBIT margin was ~10%, before the introduction of a new product roadmap, including innovative new adjacencies (autopilot systems, communication radios, fish finders, etc). With a less commoditized product offering and less competition, EBIT margins are now approaching 30%

Auto (12% of Rev and -6% of EBIT): 39% gross margin and -12% EBIT margin. Have two sub-segments – Auto OEM (discussed above). Consumer piece is profitable -  PNDs (personal navigation devices) = legacy product, decade-plus decline (90+%). Growing again, aided by RV/ATV growth, plus ancillary products (e.g. cameras). Consumer is 14% EBIT margin