Key Points
Record revenue and operating income show the business is strong.
Soaring memory chip prices will soon start to impact margins.
Garmin boosted guidance and now sees overall sales growth of about 12.4% this year.
Garmin (NYSE:GRMN) reported another strong quarter today, with revenue jumping 12% and profit margins expanding. That initially led shares to jump more than 2% in early trading.
But management provided a dose of reality on the conference call, prompting investors to reverse those gains. Garmin shares sank on the word that expanding profit margins will soon reverse course. The stock was trading down 6.2% on the day, as of 3:18 p.m. ET.
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The initial jump came as investors celebrated yet another strong quarter for the maker of GPS devices. Overall revenue grew to a record $1.99 billion, with Garmin's fitness and outdoor device revenue growing 16% and 20%, respectively, year over year.
That continued a strong run of growth in its two largest business segments. Those sales flowed to the bottom line, too, with gross and operating margins jumping to 63.3% and 30.8%, respectively. That was a notable increase over last year, when gross margin was below 60% and operating margin was south of 26%. That profitable growth has helped the stock soar nearly 175% over the past three years.
But margins are set to contract soon, according to management. CEO Cliff Pemble said fourth-quarter gross margin is expected to slide to about 61% as memory component costs have soared under tight supply driven by AI infrastructure demand. Regarding next year, Pemble stated:
We expect our consolidated gross margin profile will return to a historical range primarily due to higher memory costs.
The good news for investors is that the historical range is still about 58.5%. And today's sharp drop in the stock has Garmin's price-to-earnings (P/E) ratio down to about 25 based on the raised earnings guidance provided. That's a reasonable multiple for the strong underlying business, and could make today's price look like a great entry point when the dust settles.
Howard Smith has positions in Garmin. The Motley Fool has positions in and recommends Garmin. The Motley Fool has a disclosure policy.