Name That Trade – $GRMN: Recalculating

by Dan February 17, 2015 1:23 pm • Commentary

It looks like Google can claim the first high profile misfire in wearables with Google Glass. And its failure is a reminder just how hard it may be for other entrants into the space in the coming months/years.  Apple’s initial foray with its Watch, due in April will likely dominate the conversation for from here on out, but it is not exactly a layup that it will be a hit like their last two new product categories, iPhone in 2007 and iPad in 2010.

We can save this conversation for a later date, but I think it is important to consider some existing players in the fitness/wearable space and what the impact will be on them with any new competition.  The first name that comes to mind is Garmin. While the company was a pioneer in personal navigation devices (PNDs), it has seen this part of its business (Automobile/Mobile) decline year over year (down 5% in Q3). And to add insult to injury, one of their fasted growing segments Outdoor/Fitness (growing on avg 30% year over year, making up 33% of sales) seems the most vulnerable to new entrants like the Apple Watch. Per GRMN’s Q3 press release:


I am a bit conflicted on GRMN as a stock, it trades at only 17x expected 2015 earnings, pays a dividend that yields 3.4%, and has a very clean balance sheet with 25% of their $10.7 billion market cap in cash, with no debt.  The problem is expected growth. There is very little with consensus of low single digit earnings and sales growth in 2015, and I am not sure how much this takes into account any hit to that Outdoor/Fitness category from new competition.

Event: The company is expected to report Q4 results tomorrow before the open, the options market is implying about a 5% one day move, which is a bit shy of the 4 qtr avg of about 6% and the long term avg of 7.5%.  

Sentiment:  analysts are fairly mixed on the stock with 8 Buy ratings, 11 Holds and 1 Sell with an average 12 month price target of just 5% higher than current levels at $59.  Short interest has risen to 15% of the float, the highest level in 6 months.

Options Open Interest and Vol Snap Shot: GRMN is not exactly an active trader in the options market, with a total of just 40,000 options in total open interest. Which seems very low for a an almost $11 billion market cap company.  The single largest strike of open interest is 8900 of the April 60 calls.  Options premiums are high heading into the print, and it’s very likely that 30 day at the money implied vol declines to the low 20s following:

[caption id="attachment_50998" align="aligncenter" width="600"]GRM 1yr chart of 30 day at the money IV from Bloomberg GRM 1yr chart of 30 day at the money IV from Bloomberg[/caption]

Price Action / Techncials:  The stock is up 6% on the year, and up 11% from the lows last month. Since gapping higher above $50 a year ago on better than expected Q4 results, the stock has basically traded between $50 and $60 for the all but a few weeks. And the stock is now basically trading at the mid point of the range:

[caption id="attachment_50999" align="aligncenter" width="600"]GRMN 1yr chart from Bloomberg GRMN 1yr chart from Bloomberg[/caption]

The stock is clearly in no man’s land. The distance between where it is now and last Summer’s highs is about $6 and the distance to the lows that came afterwards (in Oct ’14 and then again around Jan 1st) is slightly more. And after the sharp rise over the last month I think its safe to say the main risk is to the downside.

We don’t have a directional bias into the print, and frankly I suspect that weakness can be pressed, while a gap to the previous highs on a beat and raise would likely find sellers.  With the strong balance sheet and lack of growth, I would expect to hear some form of increased buyback if the company issues downside guidance, possibly making them susceptible to activists or even a take-over.

For those who think the stock takes a run at the 52 week highs on a beat and raise, the Feb 57.50 calls (stock ref $56.34) offered at 1.10 look reasonable.  If you think a weak Q4 and lowered forward guidance causes the stock to retrace a good bit of the move off of the Jan lows, then the Feb 55 puts offered at 1.05 look reasonable.  The problem as always with short dated long premium trades into an event is that you need to a get a lot of things right in a short period of time to even have a shot of breaking even. We have no conviction, so no trade, but think the story is worth keeping an eye on given the company’s positioning in what is likely to be one of the biggest trends in consumer electronics since the tablet.