Give Me Some More Numbers about Garmin!

Today we're going to review the spreadsheet I commonly create when analyzing a company. A link to the spreadsheet can be found here. It does require a google account but it's currently the best place I've found to store documents like this. This specific spreadsheet is for Garmin. The first page basically includes a summary of numbers which can be gleamed from the annual report. The second page, titled "Calcs" is where I calculate the numbers interesting to me.

Here's a brief breakdown of what I track and the values for Garmin in 2005.

Return on Equity (ROE) - 26.89%

Simply put, return on equity is a percentage which represents the amount of money the company made in the current year vs the stockholder equity a company has. Stockholder equity is the amount of money the company made selling stock and all earnings it has retained for re-investment in itself. For example, if a company has 10 billion dollars in stockholder equity and made 1 billion in net earnings, it would have a ROE of 10% (Net Earnings / Stockholder Equity).

This number can be used by an investor to understand how well management is using the resources provided by the shareholder to make money.

Retention Rate - 82.65%

Retention rate is a percentage which informs you of how much of net earnings are being put back into the company versus paid out as dividends to the stock owners. This percentage tends to decrease as a company slows down it's growth rate and pays more money back to it's shareholders.

Reinvestment Rate - 22.23%

Reinvestment rate is equal to the return on equity multiplied by the retention rate. It is used by analysts to calculate a companies growth potential. To increase it a company either needs to plow more of its net earnings back into itself (implying more growth) or by increasing net earnings to the point where it increases ROE.

Return on Assets - 22.85%

Return on assets is simply net earnings divided by total assets. It's similar to ROE but it doesn't include outstanding liabilities (money the company owes) in it's calculation. The difference between return on assets and return on equity can give you a quick feel for how much the company has in liabilities.

Operating Profit Margin - 32.90%

Operating profit margin is equal to the operating profits divided by the total sales. Operating profit is just net earnings before you take off taxes. This number tells an investor how profitable a company's products are to create and sell.

Net Profit Margin - 29.30%

Net profit margin is simply the net earnings divided by total revenue. Total revenue includes money made from sales and other income (investments and dollar fluctuations). This basically shows the bottom line on how much a company makes after it pays all of it's bills.

Percent Increase in Sales - 34.78%

A comparison of how much sales increased from the previous year. Obviously another very good way to gauge company growth.

Percent Increase in Net Earnings - 51.30%

A comparison of how much net earnings increased from the previous year. Please see previous blog post for reference on why this number is so high relative to the percent increase in sales.

Once again, all of these numbers are stellar! The three quarters reported for 2006 so far have shown the same growth numbers.

Good to see the fools have my same feelings about garmin as well :)

Garmin - First Look at the Numbers

So now that everyone knows the basics about looking at a financial statement (HINT: see previous blog if this is not you), lets talk about the numbers for Garmin. For reference, here is the link to their annual report (page 63 is what we're referring to)

Net Sales

Lets look at the net sales for Garmin from 2001 - 2005. For analysis purposes we'll start sales at 2001. Here's the summary:

Company	Net Sales	Percent Increase in Net Sales
GRMN (2001)	369,119,000	0.00%
GRMN (2002)	465,144,000	26.01%
GRMN (2003)	572,989,000	23.19%
GRMN (2004)	762,549,000	33.08%
GRMN (2005)	1,027,773,000	34.78%

Note that the calculation for the increase percentage is simply the following:
((Current Year - Previous Year) / Previous Year)

Those numbers impress me. A company that can sustain that type of growth rate over that period of time is doing an excellent job at increasing sales each year. It's difficult to say how long the company can continue to sustain this type of sales growth. Obviously it has to stop at some time (and that's usually where you'll see the stock price start to level out). So far 2006 is looking good and I think they can continue at least through 2007. There is still a lot of room for growth in this area.

Net Earnings

Now lets look at the net earnings for Garmin from 2001 - 2005.

Company	Net Earnings	Percent Increase in Net Earnings
GRMN (2001)	113,448,000	0.00%
GRMN (2002)	142,797,000	25.87%
GRMN (2003)	178,634,000	25.10%
GRMN (2004)	205,700,000	15.15%
GRMN (2005)	311,219,000	51.30%

The first question that comes to my head when I look at these numbers is what the hell happened in 2004? One obvious thing is that the other income section was negative for 2004 (Lost 15 million dollars). Page 59 of the 2004 annual report explains that the majority of this other income loss was due to foreign currency exchange losses. This type of thing tends to happen with currency rate movements but still isn't something you want to see a company consistently reporting.

Page 62 also explains that an additional 47 million dollars was spent on an expansion of the Kansas facility. Removing that 47 million dollar expansion from the total costs and expenses would move the net earnings increase for 2004 to 41.46% and reduce the 2005 earnings increase to 23.16%. Kind of amazing what a facility expansion can do to your company. The point is re-iterated in the 2005 statement on page 74 of the 2005 report where they state "Capital expenditures in 2005 totaled $27.1 million, a decrease of $51.0 million from fiscal 2004". Spending less on facility expansion in 2005 greatly improved the net earnings for that year. When you look at the big picture of net earnings over these 5 years you can't help but be impresses (hence the reason from 2002-2006 garmin stock has risen 447% vs the S&P500 return of 20%).

A Random Tidbit

When earning numbers are released, one of the key motivations that moves a stock either up or down is how well the new numbers relate to it's previous numbers. For example, how does the Net Earnings for this quarter/year compare to the same number from the previous quarter/year. At times, this number comparison by the market can be a very emotional knee jerk type reaction. A smart investor could use the somewhat emotional reaction from the market to move a stock based on this number to their advantage.

Companies are going to have tough quarters. Deals don't get closed, supply problems impact delivery, ... whatever it is, it's going to happen, and the company's stock will most likely be punished for it. As long as it's a good company, and whatever caused the earnings miss has been corrected, you can almost guarantee that the companies next earning number will be much higher then the previously reported one. A great example of this can be seen if you go and look at Garmin stock history after it's 2004 earnings report vs it's stock history after the 2005 earnings report. As we proved above, the net earnings can be explained by looking a bit deeper into the financial reports but that didn't stop the market from punishing the stock after 2004 and rewarding them after the 2005 report. Sure would have been nice to buy the stock around March of 2005.

Fundamentals of a Financial Statement

Financial statements from companies can seem very intimidating at times. I have a theory that some companies do that simply to keep us small investors from seeing the big picture. Wonder if I could write a program that evaluated companies based on the simplicity of their annual report...I'm only half joking there.

Anyway, let’s start with some basics. Companies release quarterly reports, which basically report a subset of information found in the Annual Report. We're just going to focus on the Annual Report today. Within the annual report, you find three main sections:

1. Statement of earnings(aka Income Statement): Presents the companies business results for the year. It shows how much product they sold, how much it cost them to do it, and the bottom line on how much they made for the year.
2. Statement of financial position (aka Balance Sheet): Lists what the company has for assets and what they owe to other people.
3. Statement of cash flows: Measures the flow of cash into and out of the company

Annual reports are not just about the numbers. A lot of times there's a lot of good information from the companies leadership in which they summarize the year and give some good vision on what they see ahead. These of course are always going to paint pretty rosy messages but there's a lot then can be read between the lines.

Lets use the 2005 Garmin report for our example. There are lots of numbers in this document but page 63 is the best place to start.

The key numbers I always like to look at initially are the Net Sales, Costs of Goods, Total Operating Expenses, and Net Earnings.

• Net Sales: Total amount of money the company received selling it's product.

• Costs of Goods: How much it cost the company to manufacture the product
• Raw Material
• Salaries
• Other production costs.
• Total Operating Expenses: Other costs which are broken into two broad categories
• Advertising and other administrative type costs.
• Research and Development.
• Net Earnings: This is the bottom line, after all costs and taxes, this tells you how much money the company made for the year.

Other things to note are the Other Income, Income Tax Provision, and Operating Income fields. Other Income is income received (or lost) through company investments and other miscellaneous endeavors. Income Tax Provision is just what the company had to pay in taxes for the year. Operating Income is just the amount the company made before factoring in Other Income and Taxes. The Garmin financial statement actually gives you these numbers for the current year and the previous 4 years (making it even easier to do comparison).

With just these numbers, you as an investor, can begin to get a feeling for a company. Are the Net Sales going up each year? How much is the Cost of Goods going up in relation to Net Sales? Is the margin between the two increasing or decreasing. A decreasing margin can imply many things, from an increase in cost of raw material to stiffer competition. How about the Total Operating Expenses, are those increasing/decreasing at the same rate as the Net Sales? The efficiency of a company becomes very important as it grows. And of course, the Net Earnings, are they consistently going up each year? What's the percentage increase from year to year? Always be careful when analyzing Net Earnings. A common move by large companies is to increase Net Earnings by reducing Operating Expenses, and not necessarily increasing sales. This of course is still good for the investor, but can mislead some into thinking the company is growing more then they really are. Also, a reduction in Operating Expenses sometimes comes by reducing R&D efforts which may help the current quarter, but have detrimental impacts to the future.

There are of course dozens of calculations that can be done to formalize some of the things I mention above but for now we're just focused on fundamentals. Things you do within your head when you first look at a company’s annual report.

These are of course all things I should have done before purchasing Garmin....but my value side just couldn't avoid the deal I got on 11/3. The good part is that so far, it's looking like a pretty good company :)

Geek Toy of the Future

Lets start this analysis with a company I just recently purchased. Well first lets start with where I got the funds for this new stock. I recently sold off some stock that was ahead (BUD and APCC). One of the more difficult things to do in life is to sell a stock which is going up, but once in a while it's important to actually realize a profit on a stock, especially when you feel it's reaching its upper limits. I was a bit concerned about BUD's 3Q 06 profits report so sold right before them. Turns out I didn't have a whole lot to worry about. But, I'm happy with the sale, the stock has been on a minimal decline since the report. APCC is a stock I bought a couple years ago at around $16. It was up and down for a while and just recently got bought out by another company. The stock hit $30 and I decided it was time to realize some profits there as well.

But alas, I stray from todays topic. Today we are going to look at a company called Garmin (GRMN).

Lets start with the basics...

G, what does this company do?

In a nutshell they produce GPS related devices for consumer, marine, and aviation industries. The company formed in 1989 and currently has a market cap of 10 billion dollars. It's probably best if you just read their website for the details.

G, where did you find this company?

I'm by my very nature, a value investor (sometimes referred to as a cheapskate). I'm always on the look out for good companies that get punished for one reason or another un-fairly by the market. Of course you need to be careful playing this game, a lot of the times the market correctly punishes a company.

I was actually contemplating a gamble on a genetic company (LEXG) when I ran across the headlines for Garmin. A 15% drop in one day, that has value written all over it!

G, why do you like this company?

The company reported a revenue climb of 62% and it's stock price dropped 15%! Yes, I admit it, that's what caught me up initially. I even paid the $15.95 fee in sharebuilder just so I could get in cheap. What kind of ticks me off is I've actually had a garmin GPS for over three years. My dad bought it for me to go geocaching. It's a fun hobby that gets you to a lot of different, neat locations throughout the US (basically people hide containers with little knick knacks in them, they record the coordinates using a GPS, post them to the geocaching web site, another user then downloads those coordinates, finds the container using their GPS, signs a log within the container, and then logs the find up on the geocaching web site). Yes I know that was a terrible sentence. Geocachers then figure out who has the bigger ying yang by comparing who has the most container finds logged up on the web site. I just wish I'd recognized the "coolness" factor of it three years ago. In fact, it's probably a good idea to keep an eye on the company that runs geocaching.com, Groundspeak Inc. Might be some potential there some day.

Every day I turn the corner, I see a new GPS device. In a cell phone, in a new car, in a freaking watch! The possibilities just seem endless. That's another point I always try to make when investing. The product needs to make sense. It needs to be something I see value in, not just something that makes money (take for example one of my best performing stocks, BUD, I think I see a bit to much "sense" in this company at times...).

G, give me the details.

I'll plug financial details in here to show key financial statistics over the last three years (once I stop being lazy).

G, you got any good links about Garmin?

• A good blog post with some analysis on Garmin.
• I like the idea of a company giving back to it's employees.
  

G, what did it cost you?

I purchased it for $46.84 on 11/03/2006.

The Beginning

I've always been a frugal boy. I was the one who saved the lawn mowing money, the birthday money, the returnable money, just about any money I could get my hands on. The guy who would always bring the money back to his parents when they gave him some money to go out and have fun with. I'm 27 years old now and have had money invested in the stock market for 12 years. My dad initially picked my stocks for me. He started me with companies like BUD, 3M (MMM), Intel (INTC), and Johnson and Johnson (JNJ). All companies that have made me a good amount of money over the years.

I'm a high tech employee working in Austin Texas. I own a house (well I guess technically the bank own most of it), I invest 10% of my salary into my 401k plan, and try to get excess money after that into the stock market. I currently use sharebuilder for my stock transactions. I'm for the most part, a long term stock trader so the once a week purchase program that sharebuilder has works out well for me (the $4 fee).

Over the past couple of years I've been doing some of my own investing with a fair amount of success. I'd like to use this blog to record my analysis of some companies I currently own and companies I'm contemplating buying. Feedback from others would of course be appreciated.