New Products Like The Fenix 8 Series Will Expand Market Reach, But Rising R&D Costs And Tax Changes Will Squeeze Margins

Key Takeaways

• Garmin's diverse market presence and new product launches indicate potential for ongoing revenue growth and improved gross margins.
  
• Expansion of paid apps and subscription services suggests opportunities for recurring revenue growth and enhanced earnings stability.
  
• Increased R&D, tax changes, and auto sector challenges could strain margins, alongside risks from high inventory levels and mature marine product markets.

Catalysts

Designs, develops, manufactures, markets, and distributes a range of wireless devices worldwide.

• Garmin's strong performance across diverse market segments and geographies, along with increased market share in marine and advanced wearables, indicates potential for continued revenue growth.
  
• The launch of new products such as the fenix 8 series and inReach Messenger Plus, which are well-received by the market, suggest possible future revenue growth and improved gross margins due to favorable product mix.
  
• Significant improvements in gross margin driven by lower product costs and operational efficiencies point to potential net margin expansion.
  
• Garmin's global reach and diverse customer base provide the company with a solid foundation to leverage growth opportunities and improve revenue resilience despite economic uncertainties.
  
• The expansion of paid apps on the Connect IQ platform and connected subscription services implies potential growth in recurring revenue and enhanced earnings stability.

Garmin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Garmin's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.5% today to 22.4% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $9.16) by about December 2027, up from $1.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.1x on those 2027 earnings, down from 26.7x today. This future PE is greater than the current PE for the US Consumer Durables industry at 11.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Garmin Future Earnings Per Share Growth

Risks

• Increased R&D spending in the Aviation segment has led to a decrease in operating income, which could impact overall earnings if not offset by revenue growth in other segments.
  
• The softening outlook of major automakers may affect the Auto OEM segment, which could lead to lower revenue growth and operating margin compression in this segment.
  
• Higher effective tax rates due to changes in Switzerland's tax laws could impact net margins and overall profitability.
  
• Inventory levels have increased significantly, which might lead to potential overstock or increased carrying costs if consumer demand does not meet expectations, impacting cash flow and earnings.
  
• The market for marine products is mature and stable, posing a risk that future revenue growth may slow, impacting expected revenue growth estimates.

Valuation

• The analysts have a consensus price target of $192.26 for Garmin based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $265.0, and the most bearish reporting a price target of just $158.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.8 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 26.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $210.89, the analyst's price target of $192.26 is 9.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.