Name That Trade – $GRMN: Recalculating

by Dan June 16, 2015 1:14 pm • Commentary

Wearables.  Google brought us the first supposed mass market entrant from a large U.S. tech company a couple years ago with Glass, and now Apple with the Watch.  I think it is safe to say that Glass was a failure from a usefulness and PR standpoint.  Apple is likely to have success in this segment, but after wearing the Watch for two weeks (thoughts here), I would be surprised if this iteration would be the one to see mass market adoption.  Which brings me to Garmin (GRMN) a company that pioneered the personal navigation device (PNDs) for automobiles in the last decade and have had made early inroads on wearables in the fitness segment, which helped their latest quarter’s sales grow 70% year over year to 25% of their total sales, representing their fastest growing segment.  The company is very focused on the segment, as stated in their fiscal Q4 release in February:

We believe that fitness will again be the largest contributor of growth in 2015, and we have launched important new products at CES to strengthen our position in the segment. New products include the vívoactive™ and vívofit® 2. The vívoactive is a GPS-enabled smartwatch that delivers unparalleled capabilities for those with an active lifestyle, while vivofit 2 adds a backlight and vibration alert to the already popular vívofit.

While Apple’s Watch has gone for more of a fashion oriented product that is an extension of your iPhone, it appears that Garmin is going to remain focused on a standalone for those with an active lifestyle.


My early criticism of the Watch is mostly based on the fact that it is a lot more than what most first users of a wearable device would want or need.  In my mind Apple missed the boat by not first attempting to redefine the Fitbit/FuelBand/Vivo health category, and then move onto the Watch, when it’s other functions are more ready for primetime (think iPod becoming iPhone).

Garmin is an interesting company, quickly shifting focus away from Automotive and PNDs to specific use wearables/ That’s a good focus because to be honest they will never be able to compete with the likes of an Apple or Google if they were to enter the do everything wearable market.

But what do you do with this stock?  Earnings and sales growth has ground to a halt, both expected to be flat year over year.  The company is very committed to capital return (last fiscal year returned $602 million of cash to shareholders with quarterly dividends totaling $360 million and share repurchases of $242 million, with a dividend yield of 4.5%) and has a stellar balance sheet with 31% of their $8.6 billion market cap in cash ($2.7 billion) and no debt.  So at 14.5x expected 2015 earnings the stock is fairly cheap, but the real question is whether or not that E is to be believed.

Garmin is based in Switzerland, and there was a time in the last year when takeovers of foreign companies for tax inversion purposes was a thing (here), and in my mind GRMN should have been a prime candidate, but then the feds successfully made tax avoidance through such transactions far less appealing.  But The FT ran the following story yesterday – US companies regain their appetite for tax inversion deals:

According to several senior corporate advisers in the US and Europe, demand for such deals has picked up significantly in recent months and set the expectation that more transactions will be announced this year.

The desire for inversion deals comes amid feverish deal activity led by the US, as companies look to use cheap debt and high share prices to squeeze every possible synergy, including tax benefits, out of potential takeovers.

Quoting a banker: However, he said that corporate boards were looking at tax inversion proposals at a pace that was nearly the same as before the US government clamped down on the move. “They are willing to take more risk and structure deals in a way that goes around the new rules not against them,”

My View on GRMN: I have no idea how good or bad GRMN’s Vivo wearable line is, they appear to get decent reviews on Amazon (here) but I could quickly see them falling by the wayside.  The real play here would be for a take-over rooted in a U.S. company’s interest in a tax inversion.  But this week’s expected IPO of Fitbit could shine a favorable light on GRMN’s much more reasonable valuation.

Options prices in GRMN are fairly reasonable, with 30 day at the money implied vol at about 25%, recently coming off of 52 week lows, making long premium directional trades attractive for those with a directional inclination:

from Bloomberg
from Bloomberg

The one year chart below shows today’s precarious bounce at best above key near term support at $45 that is blasted through yesterday:

GRMN 1yr chart from Bloomberg
GRMN 1yr chart from Bloomberg

The five year chart below shows the importance of the $45 level:

GRMN 5yr chart from Bloomberg
GRMN 5yr chart from Bloomberg

The next identifiable catalysts will be fiscal Q1 earnings estimated to be in late July, falling in August expiration.  August options will be the ones to own, but won’t be listed until Monday, so we will check back then.

But today the two most active options are 2400 of the July 45 calls, with a block of 1500 bought for 1.22 when the stock was $44.81, and 2200 of the June 45 calls, all bought to open, last trading at 50 cents.  I suspect some short dated call buyers see the Fitbit ipo as a potential positive catalyst. We are a bit more skeptical. But will be sure to take another look early next week.