Rule #1 Finance Blog

With Investor Phil Town

IS GARMIN YUMMMMY? (PART II)

My look at Garmin started with whether I wanted to own it, whether I understood it and whether it had moat.  So far so good.  Next I want to look at management, Value and Yield:

M: Management. Which means Dr. Min Kao, Founder, Chairman and CEO.  Here’s the summary I got from articles about him that I got when I googled "Min Kao" Garmin.

  1. Dr. Min Kao’s BAG:  (I want to hook up with guys who want to change the world and have really committed themselves to it.  I call that a Big Audacious Goal – BAG):  “To bring GPS to the masses”.  Nice.
  2. How does he intend to do that BAG?  He says he intends to make the best product, at the lowest cost to build,  and to do that he is going to go for vertical integration. 
  3. What kind of guy is Dr. Kao?  He seems like he’s all about this company.  No indication otherwise.

I like the sound of this guy.  He seems like a guy I’d like working for me.  Management gets an A.

M: Margin of Safety (MOS).  MOS is all about finding the real value today of Garmin.  A guy asked me what I meant by value: did I mean the book value or the market cap or price or what?  I told him he was seriously confused if he thought any of these were the value of Garmin. 

     Price is not value.  It’s just what the market is paying today.  It might be the value and it might not.  Depends on how rational the market is.  And that changes.

     Market Cap is not value.  It’s just the price of the stock times the number of shares… essentially the same thing as price.

     Book Value is not value either.  It’s just the value of the dead company.  Like the value of a race horse that just broke its leg is about the hide, the bones, the horsemeat and the hooves.  The horse was worth $10,000,000 a minute ago but now he’s worth about $147.50.

     Value is what I call the Sticker Price: the price of the car that they put on the sticker on the window.  Its retail.  I don’t like to pay retail for a car or a business.  I’d rather shop around and get a deal.  But since there is no blue book for businesses, we’re going to have to decide what the Sticker Price should be and go from there.  Here’s how to find the Sticker Price:

1.   current eps (look it up): 2.08

2.   zacks growth rate (look it up): 15%.  Historical growth rate (calculate it) 25%   Hmmmm….  The industry is expected to triple in 7 years.  17%.  I’m putting Garmin at 20%.

3.      Future EPS: (on excel) =fv(20%,10,,-2.08) = $12.88

4.      Future PE: 2 x 20% = 40.  Historical is 25.  Use 25

5.      Future Value in 2015:  25 * $12.88 = $322

6.      Sticker Price in 2005:  =pv(15%,10,$322) = $80

7.      MOS = 80/2 = $40

8.      Current Price = $44

9.      Do we have a margin of safety?  Almost as much as we like, but a 45% MOS isn’t that far off 50%.

(Note here that I got a bit different Sticker Price than Mark did.  He came up with a Sticker of $139.  I got a Sticker of $80.  Big diff.  He got his by a mistake:  He added the latest quarter to the annual EPS, which is a good idea but only if you dropoff the spring quarter from 2004.  Current EPS is always 4 quarters.  If he did that he would have an EPS for the last 12 months instead of an EPS for the last 15 months.  My EPS followed Mark’s advice by adding in the latest quarter of $0.58 per share (and then dropping off one quarter) for a total of $2.08.  Also I’m using the historical PE of 25 instead of an estimated PE of 40.  Mark is using 38.  He may be right.  But the market isn’t giving Garmin the higher PE because it isn’t confident of the numbers.  By going with a more conservative PE, we build in an additional layer of safety.  If Garmin establishes solid earnings growth, the PE will go to 40.  If that happens we’re going to get an incredible home run out of this.)

M: Mr.Market:  This guy is our partner.  He will sell us anything, but he gets to name the price.  Good thing he gets scared easily and names cheap prices on great businesses.  How does our partner feel about this stock?

a.      Price Pattern is bouncy and Success rates it 1.75 – red.

b.      MG – Zacks score at Success is 3.25 and Green

c.      News is good

d.   PE is well below what it could be.

Mr. Market is starting to like this one, but it’s not too late for us since it is well under Sticker.

Y: Yield.  This is a final check off for a long term hold and is the secret Buffett has for getting huge long term success.  It isn’t that hard to get an annual 25% compounded Rate of Return if a bunch of your businesses are throwing off 100% annual Rates of Return or Yield.  Let’s look at the Yield for Garmin if everything goes our way by the year 2015 and 2025.

1.      Current Yield = EPS / Price = $2 / $44 = 4.5%

2.      2015 Yield @ 20% = fv(20%,10, 4.5) = 28%

3.      2025 Yield @ 15% = fv(15%,10,28) = 113%

4.  This means that if all goes well, our current investment of $44 will be paying off about $50 per year in 20 years.  That’s Buffett’s secret.

4.      Yield above 100% in 20 years is great.  We have a good entry point for a long term hold.

And here’s the results in grade/score form:

GRADE

SCORE

Y

A

4.0

U

B

3.0

M

A

4.0

M

A

4.0

M

A

4.0

M

A

4.0

Y

A-

3.5

TOTAL

26.5

SCORE

A

3.8

Great score.  But I’d want to bring that B on understanding to an A before I popped real money in there.  Mark, who lives by Garmin and who uses their product, may already be totally comfortable with his understanding of the business and ready to go.  If he is, I’d say absolutely go for it!