Following the announcement of the largest deal ever in pharma stocks yesterday we discussed the potential for tax inversion m&a to hit the tech space (Trade Idea – ARMH: An ARM and a Leg), as that seems to be in large part the motivation for the Pfizer/Allergen deal. In the post, I highlighted the potential for another deal in semiconductors, a subset of the technology sector that has already seen $100 billion worth of deals announced in 2015. Here are my my notes from a segment on CNBC’s Fast Money from Monday night and my short list:
ARMH – UK, $23 billion market cap, maybe AAPL, been floated before, they design most of AAPL pc chips, but don’t manufacture them, QCOM or TXN, also customers.
SAP – Germany, $97 billion market cap, maybe ORCL?
GRMN – Switzerland – $7 billion market cap, maybe a TXN or QCOM.
NXPI – Netherlands, currently in deal to buy Fresscale, NXPI $20 billion market cap, prob tough to do.
Today I want to take a quick look at Garmin (GRMN), a stock I last looked at back in June (Name That Trade – GRMN: Recalculating), largely due to its positioning in the nascent wearables space and in response to my belief that Apple (AAPL) whiffed on its first foray into the space with its Watch:
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”
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.
Not much has changed in my view since I wrote these comments nearly 6 months ago, aside from the fact that GRMN has declined nearly 20%, and is down 28% on the year. The company guided down the full year for both earnings and sales, and importantly, for this discussion, guided the fitness segment’s growth from the prior view of 25% year over year to just 15%. Investors had reason to be disappointed as the hope for the company was an aggressive pivot away from personal navigation devices with a renewed focus on wearables that was highlighted by AAPL’s entrance to the space. It appears that AAPL’s watch did a number on GRMN’s sales of its Vivo line of sport watches. If the company could build on its early mover advantage in gps wearables then maybe they can build on their niche positioning in what will likely be an exploding athletics segment for such devices. GRMN’s earnings are expected to decline 27% in 2015, while sales are declining only 3%. The stock’s dividend yield is about 5.3%, and the company has a rock solid balance sheet with 33% of their $7.2 billion market cap in cash, with NO debt. Short interest sits at about 10% of the float. The balance sheet seems prime for an activist investor.
Oh, back to inversions, the company is headquartered in Switzerland, with about a 21.5% tax rate. This could be attractive for a U.S. based consumer electronics company, but as you know, there are not many left. Maybe Google or Microsoft would have an interest, but neither company would attempt the tax dodge.
The stock is cheap regardless, trading 16.7x next year’s expected earnings that are supposed to be flat after this year’s debacle, helped along by massive currency headwinds from the sinking Euro, a region the company gets a third of their sales from.
So what’s the trade?
Playing simply for an inversion is too myopic. But if you believe the balance sheet, the stock’s poor performance and the potential for a acceleration in growth in their fitness division next year could make the stock attractive into 2016, and you want the possibility of some sort of tax inversion as your lotto ticket on top of that, then you may want to consider the following trade:
Trade Idea – GRMN (38.13) Buy the Dec/ April 40 call calendar for 1.20
- Sell 1 Dec 40 call at .22
- Buy 1 April 40 call for 1.42
Rationale – Implied vol is low and options are dollar cheap so calendar vs. a straight call purchase depends on whether you want to continue to finance the April call. In this situation you want GRMN to slowly approach 40 into year end. Ideally, once the December portion of the trade expires you would be left with a dollar cheap upside call with several options to further reduce premium risk or simply let it ride at that point if the stock is strong in the beginning of 2016.