Garmin Earnings: Marine Slowdown While Fitness Shines; Shares Remain Attractive

Garmin GRMN reported solid second-quarter results, with revenue in line with our model and earnings per share more uplifted than we expected. Management increased full-year guidance for revenue to $5.05 billion due to strong sales this quarter.

We maintain our fair value estimate of $129 per share as strength in other segments overpowers a marine sales slump as macroeconomic headwinds and increased interest rates weigh on demand for midrange to lower-end boats. We expect this to persist and affect financial results throughout the end of 2023. Another trend we expect to see into 2024 is negative operating profit from the auto segment. Nonetheless, we think marine weakness will straighten out in the long term and scale will help auto profitability in the future. All in all, we see shares as undervalued.

Revenue for the quarter was $1.32 billion, marking 6% growth year over year. The marine segment saw significant weakness, with revenue decreasing 11% year over year—largely as a result of promotions timing and higher interest rates that impact decision-making for boats with an expensive price tag. The moaty aviation segment grew 6% year over year and is forecast to grow at a moderate pace in the back half of 2023. Fitness performed well above our expectations for the quarter, after we had previously tapered the segment upon reassessing COVID-19-related lasting demand. Nonetheless, this segment can be lumpy by nature, and we still hold firm on our fitness demand moderations made earlier this year.

Operating margin for this quarter was 21.5%, a 2.1 point decline year over year. Personnel and IT systems were large contributors to the increase in research and development and selling, general, and administrative expenses that influenced operating margin. Although gross margin increased on a year-over-year basis, there was still downward pressure on it from the auto and fitness segments. Nonetheless, still non-GAAP EPS came in at a solid $1.45.