Garmin Navigates Its Way to a Narrow Moat
Although auto GPS is in secular decline, the marine segment helps maneuver the firm to its moat rating.
We are reinitiating coverage of Garmin (GRMN) with a narrow moat and a fair value estimate of $48. Although the firm is best known for its portable navigation devices, or PNDs, used in cars (which is a business in secular decline), it has a strong position in niche markets such as outdoor, marine, aviation, and fitness. We believe Garmin can continue to grow revenue in those markets to offset the decline in the auto segment. Further, we expect Garmin to generate long-term excess returns and continue to distribute dividends to shareholders. Nevertheless, we recommend a wide margin of safety before investing in the name as the shares currently are trading in 3-star territory, and slightly above our fair value estimate.
However, the firm has maintained a strong position in other niche markets (outdoor, marine, aviation, and fitness) which have been profitable and growing. For example, Garmin has been delivering technology products for boats and aircraft, where GPS accuracy and reliability are critical because of possible dire consequences if the navigation system malfunctions. Customers do not want to run the risk of losing such a system while flying or in the middle of the ocean where no cellular signals exist. Some barriers to entry in these markets, such as compliance costs brought on by government regulations, may also prove to be advantageous for Garmin.
Ali Mogharabi has a position in the following securities mentioned above: AAPL. Find out about Morningstar’s editorial policies.