Garmin (NYSE: GRMN) stock tumbled by 6.1% through 11:45 a.m. ET Friday after investment bank Barclays downgraded shares of the GPS guidance specialist from equalweight (i.e., hold) to underweight (i.e., sell), and cut its share price target from its previous $181 to $133.
With its shares up by 72% over the last 52 weeks, Garmin has outperformed the S&P 500 by a factor of nearly three. According to Barclays, that was too much outperformance, the stock is now "overly extended," and it's time to take profits.
Why Barclays doesn't like Garmin
Garmin grew its sales 14% last quarter, but profits rose only 4%, a weak result that Barclays interprets as meaning that the "underlying consumer hardware spend environment remains muted." In worse news for shareholders, it is the analyst's opinion that some Garmin sales that would have happened in 2024's second half got pulled forward into the first half, with the implication being that sales growth for the rest of the year will be lower.
Further, Barclays warns of a "negative mix shift" that could impact profits even more than sales. The banker anticipates that Garmin will sell relatively fewer high-margin aviation products in the second half of this year than in the first half, and more low-margin automotive products, resulting in weaker gross profit margins.
All things considered, Barclays forecasts Garmin will earn $6.05 per share in 2024. Suggesting that a valuation of 22 times earnings would be appropriate for the stock, Barclays lowered its price target on Garmin to $133. That implies a decline of as much as 22% over the next 12 months beyond Friday morning's drop.
Is Garmin stock a sell?
Garmin is valued at 25.5 times both earnings and free cash flow now, and most analysts agree it probably won't grow earnings faster than 10% annually over the next five years -- giving it a 2.5 PEG ratio and a 2.5 price-to-free-cash-flow ratio as well. And if Barclays is right that its profit margins are going to slip, the stock's even more overpriced.
It's time to sell Garmin stock.
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Rich Smith 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.
