Garmin Outlook Called 'Bleak,' Expected To Underperform Remainder Of 2017

Reviewing Garmin Ltd. (NASDAQ: GRMN)'s first-quarter results, JPMorgan downgraded shares of the company, citing valuation and its belief that the prospects for upside surprise and the elusive return to sustainable growth are bleak through the end of 2017.

The firm's assessment is premised on the tougher year-over-year comparisons for the maturing fitness business and continued decline in Auto/PND segment sales.

Q1 Print

Analysts Paul Coster, Paul Chung and Mark Strouse noted the company reported first-quarter pro forma earnings per share of $0.52 and revenues of $639 million, better than the consensus estimates. According to the analysts, sales growth of 2.3 percent was driven by an expected decline in Auto PND and a slight decline in Fitness.

Gross margins expanded 382 basis points year-over-year to 58.3 percent, with the improvement seen across the board, the analysts noted. Additionally, pro forma operating margins climbed 156 basis points to 19.5 percent, with Marine and Aviation among the chief contributors.

Among other things, the analysts noted Garmin generated $95 million in free cash flow, ended the quarter with net cash per share of $12.18, paid $96 million in dividends and bought back $28 million in shares.

Outlook

JPMorgan introduced its 2019 pro forma earnings per share guidance of $2.75 on revenues of $3.07 billion, suggesting flattish earnings per share growth on just 1 percent sales growth through 2019.

Meanwhile, the firm noted the company reiterated its 2017 pro forma earnings per share guidance of $2.65 and revenue guidance of $3.02 billion. This compares to the consensus estimate of $2.65 per share in pro forma earnings and $3.02 billion in revenues.

Downgrading To Underperform

"Though GRMN is seeing solid and sustainable growth in outdoor, marine, and aviation segments, we foresee continued decline in auto/PND and flattish prospects for the maturing fitness segment. Gross and operating margins are very strong, and it is difficult to envisage further expansion in margins without yielding market share," JPMorgan said.

"In short, we are struggling to find the revenue and earnings growth that can justify the premium valuation at which the stock is currently trading."

As such, the firm downgraded its rating on Garmin to Underweight from Neutral, while lowering its price target to $50 from $55.

At the time of writing, shares of Garmin were up 1.27 percent at $51.32.

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