Why Garmin Stock Is Sinking This Week
Key Points
Garmin's sales growth reaccelerated over the last two years, and the market was expecting these rapid increases to continue.
However, the company slightly missed on the top line in its earnings report on Wednesday.
Ultimately, Garmin remains a well-diversified behemoth with its GPS-powered products and could be a promising dividend growth stock.
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Shares of Garmin (NYSE: GRMN) -- home to a number of GPS-infused products -- were down 15% this week as of noon ET on Friday, according to data provided by S&P Global Market Intelligence.
The company reported third-quarter earnings on Wednesday and announced that sales grew by 12% and earnings per share (EPS) were flat.
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These figures were less than what analysts had hoped for, so the stock dropped -- even though it raised its full-year EPS guidance from $8 to $8.15.
Garmin's lofty valuation demands excellent results
In 2022, Garmin's price-to-earnings ratio was 15. Prior to Wednesday's earnings, this figure had more than doubled to 32.
Even though Garmin's sales growth had accelerated back to around 15% over the last two years, this skyrocketing valuation meant that the market was expecting near-perfection. And in Q3, the company didn't quite meet these lofty standards.
From a longer-term perspective, Garmin's quarter wasn't anything to panic about.
Image source: Getty Images.
The company has grown to become much, much more than just the GPS screens people used on roadtrips prior to smartphones.
Today, Garmin operates in five distinct business segments: fitness, outdoor, aviation, marine, and auto OEM. This setup simultaneously provides the company with operational diversification and growth optionality.
Furthermore, the company has nearly $4 billion in cash with virtually no debt and has grown its dividend by 8% over the last five years. Despite increasing its payments for seven straight years, Garmin's 1.6% dividend is well funded, only using 41% of the company's total net income.
Now trading at a more reasonable 26 times earnings, Garmin remains an interesting stock for dividend growth investors. Generating 5 times the total returns of the S&P 500 since 2000, Garmin looks poised to keep compounding returns.
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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Garmin. The Motley Fool has a disclosure policy.
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