Why Is Garmin (GRMN) Down 29.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Garmin (GRMN). Shares have lost about 29.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Garmin due for a breakout? 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 Q4 Earnings & Revenues Surpass Estimates

Garmin Ltd. reported fourth-quarter 2019pro-forma earnings of $1.29 per share, beating the Zacks Consensus Estimate of $1.00. Moreover, the figure improved 26% on a year-over-year basis and 1.6% sequentially.

Net sales came in at $1.102 billion, up 18% from the year-ago quarter and 18% sequentially. The top line also outpaced the Zacks Consensus Estimate of $998.6 million.

Strong performance of its fitness, outdoor, marine and aviation segments drove the year-over-year top-line growth.

Management is focused on continued innovation, diversification and market expansion to explore growth opportunities in all business segments.

Segmental Revenues

Outdoor (27% of net sales): The segment generated fourth-quarter sales of $294.8 million, improving 16% year over year. The year-over-year increase was primarilydriven by robust demand for Garmin’s adventure watches.

Fitness (34%): This segment generated sales of $372.5 million, which increased 34% from the year-ago quarter. This can be primarily attributed to its well-performing advanced wearables. Further, positive contributions from the Tacx buyout aided top-line growth.

Aviation (18%): The segment generated sales of $193.1 million, improving 22% on a year-over-year basis. This can be primarily attributed to the well-performing OEM and aftermarket systems.

Marine (11%):Garmin generated sales of $115.8 million from this segment, increasing 22% on a year-over-year basis. The company witnessed growing demand for chartplotters, advanced sonars and the revolutionary new Force trolling motor during the reported quarter,which in turn drove the segment’s topline.

Auto (10%): This segment generated sales of $126 million, down 15% from the prior-year quarter. The decline was mainly due to shrinking of the personal navigation device market and lower year-over-year OEM sales.

Operating Results

In the fourth quarter, gross margin was 58%, which contracted 90 basis points (bps) from the year-ago period.

The company’s operating expenses of $363 million were up 11% from the prior-year quarter. However, as a percentage of revenues, the figure contracted 210 bps year over year to 32.9%

Operating margin of 25.1% in the reported quarter expanded 120 bps year over year.

Balance Sheet& Cash Flow

At the end of the fourth quarter, cash, cash equivalents and marketable securities came in $1.40 billion, higher than $1.28 billion in the third quarter.

Inventories were $752.9 million compared with $749.8 million in the third quarter. We note that the company had no long-term debt in the reported quarter.

At the end of the fourth quarter, it generated free cash flow of $208 million.

2020 Guidance

For 2020, Garmin issuedits guidance for pro-forma earnings of$4.60 per share. 

The company expects revenues to be $4 billion. 

It expects gross and operating marginsto be 59.2% and 23.5%, respectively, for 2020.

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

Currently, Garmin has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. However, 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

Garmin has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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