• Headwinds still exist, but Garmin’s top-line is starting to grow again.

The shift of consumers away from purpose-built automotive GPS and towards GPS-enabled phones has hurt Garmin since 2009. However, a new fascination with wearable GPS-equipped fitness monitors among the public and healthy niche markets in Aviation and Boating has allowed several of Garmin’s business lines to offset the weakness in automotive GPS solutions. Revenues have flat-lined for years at Garmin, but no more – the firm will generate decent top-line growth over the next few years, even in a worse-case scenario.

  • The company’s fastest growing segments have maintained a relatively high profit margin despite an increasingly competitive market.

Margins for its Automotive and Marine segments have already fallen to what looks like a normalized level in the mid-teens percent operating margin range. Perhaps the newness of GPS wearables has allowed Garmin a little breathing room in the Outdoor and Fitness segments, because, so far, the firm has succeeded in holding onto mid-twenty percent operating margin range. While we think the firm’s Aviation segment will retain high profitability, we expect competition in the wearables business to start to erode the capacity for Garmin to convert Outdoor & Fitness revenues to profit over the next five years.

  • The shares have a large proportion of insider ownership, so the effectiveness of a bearish strategy may be reduced.

Insider ownership of this $9 billion market cap company is high – with roughly 40% of the shares held by board members, managers, or their families. Some investors take this high of an ownership percentage as a bullish sign, so are hesitant to short the shares. Experienced short sellers are also generally leery about making bearish investments when the “float” of the shares (the shares actively traded by investors) is somehow restricted as in the case of high insider ownership. According to data from YCharts, only around 7% of the outstanding shares are presently sold short, which strikes us as a very modest short interest.

On the other hand, the company is domiciled in Switzerland to take advantage of very low corporate income taxes in that jurisdiction. The firm can take advantage of both the foreign domicile’s advantageous tax laws and the very liquid and well-regulated US capital markets due to a US rule related to concentrated ownership of shares. If US lawmakers or regulators change rules to punish such “tax inversions” as these, it is likely that the market would very rapidly reprice the shares lower.

In general, the faddish nature of the firm’s most visible product and its large insider ownership are both factors that work against a bearish position, in our opinion. This effect is partially offset by the possibility of a tax regulation-related downward repricing.