Garmin (GRMN) Up 12% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Garmin (GRMN). Shares have added about 12% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Garmin due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Garmin’s Q1 Earnings & Revenues Surpass Estimates

Garmin Ltd. reported first-quarter 2020 pro-forma earnings of 91 cents per share, beating the Zacks Consensus Estimate by 8.4%. Moreover, the bottom line improved 25% on a year-over-year basis but declined 29.4% sequentially.

Net sales came in at $856.11 million, which surpassed the Zacks Consensus Estimate of $838.4 million and increased 12% from the year-ago quarter. However, the top line decreased 22.3% sequentially.

Strong performance delivered by the company’s fitness, outdoor, marine and aviation segments drove year-over-year revenues.

However, sluggishness in its auto segment remained a concern.

The company has withdrawn full-year 2020 guidance on account of uncertainty prevailing in the market due to coronavirus pandemic.

Nevertheless, Garmin’s strong focus on continued innovation, diversification and market expansion to explore opportunities across all business segments remains a major positive.

Segmental Details

Outdoor (20.5% of net sales): The segment generated sales of $175.1 million during the reported quarter, improving 14% year over year. The year-over-year increase was primarily driven by robust demand for Garmin’s adventure watches.

Fitness (26.1%): This segment generated sales of $223.6 million, which increased 24% from the year-ago quarter. This can be primarily attributed to its well-performing advanced wearables. Further, positive contributions from the Tacx buyout contributed to the top line.

Aviation (22%): The segment generated sales of $188.6 million, improving 10% on a year-over-year basis. The company’s varied product categories remained a major positive.

Marine (19%): Garmin generated sales of $163 million from this segment, increasing 22% on a year-over-year basis. The company witnessed solid momentum across chartplotters and advanced sonars during the reported quarter, which in turn drove the segment’s revenues.

Auto (12.4%): This segment generated sales of $105.8 million, down 17% from the prior-year quarter. The decline was primarily due to shrinking of the personal navigation device market and lower year-over-year OEM sales.

Revenues by Geography

Americas: Garmin generated sales of $427.4 million from this region during the reported quarter (50% of net sales), up 13% year over year.

EMEA: This region generated sales of $299.9 million in the first quarter (35%), up 15% on a year-over-year basis.

APAC: The company generated sales of $128.8 million from this region (15%), improving 2% from the year-ago quarter.

Operating Results

In the first quarter, gross margin was 59.2%, which expanded 20 basis points (bps) from the year-ago period.

The company’s operating expenses of $329.5 million were up 9.7% from the prior-year quarter. However, as a percentage of revenues, the figure contracted 70 bps year over year to 38.5%.

Operating margin of 20.7% in the reported quarter expanded 90 bps year over year.

Balance Sheet & Cash Flow

As of Mar 28, 2020, cash, cash equivalents and marketable securities came in $1.44 billion, higher than $1.40 billion as of Dec 28, 2019.

Inventories were $790.2 million compared with $752.9 million in the fourth quarter. We note that the company had no long-term debt in the reported quarter.

Further, the company generated $225.9 million of cash from operations during the reported quarter compared with $234.4 million in the prior quarter.

At the end of the first quarter, it generated free cash flow of $185 million.

Further, Garmin paid dividend worth $109 million to the shareholders in the first quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -67.8% due to these changes.

VGM Scores

Currently, Garmin has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Garmin has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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