High forward PE ratio
Garmin (GRMN) shares are trading a forward 2019 PE ratio of 23.4x. The ratio is 21.9x for 2020. Compared to Garmin’s earnings growth of 1.6% for 2019 and 5.3% for 2020, you can see that the stock is overvalued at the current prices.
Garmin shares have risen 44% since December 2018 due to strong fourth-quarter earnings and tech stocks’ recovery. However, are the company’s earnings above analysts’ estimates enough for investors?
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Why is Garmin trading at a PE ratio of 23x when the earnings growth is 1.6x? The company has a dividend yield of 2.6%. The stock will be overvalued even if it loses over 50% in market value.
Garmin’s sales are estimated to rise at a faster pace than its earnings, which indicates low operating leverage. The company will need to grow its earnings by at least 20% to keep investors interested.
Garmin stock had a fantastic run over the last three years. The stock rose more than 100% during that period.
In the last three years, Garmin’s EPS rose at a CAGR of 15%, while the stock generated compounded returns of 28%. Is Garmin’s market rally over?
Competition might impact sales
Garmin’s revenue growth over the next few years will likely be lower than the overall wearable market. The company is struggling to hold its own in a market dominated by Apple and other large players.