Shares of Garmin(NYSE: GRMN) have been a big winner this year, up more than 30%. The global-technology leader, recognized for its navigation and communications devices, has benefited from an ongoing diversification of its product lineup. Indeed, the company's latest-quarterly update was highlighted by solid growth and record profitability.
The headlines are positive, but is that enough to keep the rally going? Here's what you need to know before buying Garmin stock.
A recap of Q2 2024 earnings from Garmin
Garmin reported second-quarter earnings per share (EPS) of $1.58 for the period ended June 29, coming in $0.17 ahead of the average Wall Street estimate, and up 9% from the prior-year quarter. Net revenue of $1.5 billion climbed by 14% year over year.
The automotive original-equipment manufacturer (OEM) segment led growth with sales rising by 41% from last year. Garmin is capturing demand as a supplier to major automakers for in-cabin domain controllers, including increasingly high-tech vehicle infotainment systems.
The company's fitness segment, covering wearables like smartwatches and fitness trackers, has also been strong with a 28% sales growth compared to Q2 2023. Garmin's 2023 acquisition of JL Audio boosted results in the Marine segment, also contributing to the earnings momentum. Overall, this was an impressive quarter as the operating margin reached 22.7% from 21.5% in the period last year.
Management projected confidence in the outlook by hiking full-year guidance. Garmin now expects 2024 revenue of $5.95 billion, an increase of 14% from 2023, and up from the prior 10% estimate. Similarly, 2024 earnings per share (EPS) is expected to reach $6 compared to the $5.40 forecast issued earlier this year.
Image source: Getty Images.
A pricey valuation warrants some caution
There's a lot to like about Garmin, which appears to be hitting its stride in terms of effectively executing a global-expansion strategy. A theme of devices like wearables and navigation systems becoming more connected with new technologies offers a significant long-term growth opportunity the company is well positioned to capture.
That being said, with the stock near a record high and up more than 50% over the past year, the trends from Garmin are hardly a secret. Shares are trading at 28 times management's 2024 EPS guidance, well above the five-year median valuation multiple of about 21.
One interpretation is that the stock may be overvalued, commanding a pricey premium against a high bar of expectations. While this doesn't necessarily mean shares will fall from here, it does raise the risk in a scenario where conditions slow going forward.
Even with the Q2 results, organic sales growth excluding the JL Audio acquisition was less robust. Another concern is how much further upside there is in the operating margin from a structurally high level. Garmin remains exposed to its connection to the automobile industry, outdoor goods, and consumer spending, which remain volatile.
GRMN PE Ratio (Forward) data by YCharts.
I'm staying on the sidelines
I believe a hold rating on shares of Garmin at the current level is prudent. This is a high-quality stock, but some consolidation of recent gains over the next several months is likely, in my opinion. Patient investors may be able to pick up shares at a lower price point on any near-term weakness.
Over the next few quarters, it will be important for the company to continue presenting strong growth with cash-flow trends and the operating margin as key monitoring points.
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Dan Victor 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.
