On Friday, an analyst from Barclays (LON:BARC) issued a downgrade for Garmin Ltd . (NYSE:GRMN) stock, changing its rating from Equalweight to Underweight. Alongside the downgrade, the analyst also reduced the price target for the company's shares to $133 from the previous target of $181.
The downgrade was influenced by a mix of factors, including Garmin's stock performance, which has seen an approximate 40% year-to-date increase, outpacing the Nasdaq's 14% rise. This surge in stock price was attributed to Garmin's strong execution, robust cash generation, and impressive earnings results in recent quarters, showcasing the company's diversification and product innovation.
Despite the positive performance, there are concerns about the sustainability of Garmin's stock momentum. On the day the company reported strong second-quarter results for 2024 and raised its forward guidance, the shares underperformed the market by about 6 points. This underperformance indicates that market expectations may have been overly optimistic in the preceding months.
Barclays highlighted the issue of Garmin's valuation, which at 30 times the analyst's estimated earnings per share (EPS) for calendar year 2024 and 27 times for 2025, is considered high compared to the company's historical five-year average multiple of 22 times. The analyst finds it difficult to justify the current valuation, especially given the ongoing negative mix shift and uneven consumer spending, factors which are pressuring forward gross margins.
The analyst's review suggests that Garmin's growth and margins are very similar to those experienced between 2019 and 2021, a period during which the company's shares traded at 22 times P/E. The current valuation is seen as lofty, particularly when considering that from 2015 to 2019, Garmin traded at sub-20 times P/E with slightly superior revenue/EPS growth and margins.
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