– By GF Value
The stock of Garmin (NAS:GRMN, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $132.09 per share and the market cap of $25.3 billion, Garmin stock is estimated to be significantly overvalued. GF Value for Garmin is shown in the chart below.
Because Garmin is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 9.7% over the past three years and is estimated to grow 7.67% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Garmin has a cash-to-debt ratio of 24.30, which is better than 83% of the companies in Hardware industry. GuruFocus ranks the overall financial strength of Garmin at 7 out of 10, which indicates that the financial strength of Garmin is fair. This is the debt and cash of Garmin over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Garmin has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.2 billion and earnings of $5.16 a share. Its operating margin is 25.18%, which ranks better than 96% of the companies in Hardware industry. Overall, the profitability of Garmin is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Garmin over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Garmin is 9.7%, which ranks better than 73% of the companies in Hardware industry. The 3-year average EBITDA growth rate is 14.7%, which ranks in the middle range of the companies in Hardware industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Garmin’s return on invested capital is 24.79, and its cost of capital is 5.46. The historical ROIC vs WACC comparison of Garmin is shown below:
In short, Garmin (NAS:GRMN, 30-year Financials) stock is estimated to be significantly overvalued. The company’s financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Hardware industry. To learn more about Garmin stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.