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Garmin’s Short-Term Decline?

On February 18, Garmin Ltd. (GRMN) led the decliners on the Nasdaq, with its shares falling more than 8.9% from Tuesday’s close.

The price drop came on the heels of the company’s FY 2015 guidance – which was below analysts’ expectations.

Is Garmin navigating straight to the gutter, or is the company “rerouting” towards a profitable future?

Before coming to finite conclusions on Garmin, let’s take a look at the big picture…

Quarterly and Full-Year Results Go All Directions

While Garmin’s FY 2015 guidance was a miss, the company’s fourth-quarter and full-year results showed signs of strength in several areas…

Garmin reported a total revenue of $803 million in the fourth quarter – a 5.7% increase over the $759 million reported in the same quarter last year.

The number handily beat analysts’ fourth-quarter expectations of $790 million.

The company’s Q4 gross profit margin increased from 52% to 54%. Meanwhile, its operating profit margin saw a slight decrease from 23% to 22%, primarily due to increased research and development spending.

Garmin reported a Q4 profit of $210.2 million, or $1.09 per share, beating the $0.83 EPS from the year-ago period.

However, adjusted for pretax gains and non-recurring items, Garmin reported earnings of $0.77 per share – a miss against the Capital IQ Consensus Estimate of $0.79 (not horrible).

For the year, Garmin reported total revenue of $2.87 billion, an increase of 9% over the FY 2013 revenue of $2.63 billion.

But Garmin did fall short when it reported a full-year profit of $364.2 million, or $1.88 per share. Compare this to the company’s FY 2013 EPS of $3.12, and we’re seeing a year-over-year decline of 39.7%.

A Profitable Future

Now, that near-40% decline – along with a miss on guidance – is a tough pill to swallow, but there are plenty of reasons to remain bullish on Garmin.

Garmin’s non-automotive segments delivered 58% of the firm’s total revenue.

This shows the company has successfully migrated away from reliance on its automotive and mobile personal navigation device (PND) segment, which posted a revenue decline of 11% amid a saturated market.

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Leading the way in non-automotive segments is the company’s entry into the fitness segment, which posted revenue growth of 70% in Q4 2014. The growth of the fitness segment will easily make up for the falling revenue of the automotive unit.

Gross margins for the fitness segment were also very strong at 61%. However, operating margins declined to 29%, due to an aggressive advertising budget and point of sale displays.

The company expects the fitness segment to be the largest contributor of growth in 2015, followed by the aviation segment, which delivered 22% of the company’s operating income growth in 2014.

Better yet, Garmin forged a new relationship with Gulfstream, which will solidify the company’s opportunities for gains in market share across other aviation categories in time.

When comparing the positives and negatives, Garmin looks very promising.

Now, based on Wednesday’s closing price of $50.70, Garmin offers an exceptionally attractive entry point for investors.

By performing a discounted cash flow analysis based on Garmin’s expected free cash flow, the company’s true stock value is currently north of $65 and offers a potential upside of more than 25% from current values.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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