Garmin (GRMN): Record 62.4% Margin, Stock +12.6% — But H2 Is Guided To +7%. Is GRMN a Buy?

Garmin Ltd. (GRMN) Q2 2026 — Reported July 29, 2026 pre-market for Q2 2026 (the 13 weeks ended June 27). Revenue $2,022M (+11.4%) vs ~$1.93B expected. Pro forma EPS $2.81 vs $2.30 expected, a $0.51 beat; GAAP EPS $2.80. Gross margin a record 62.4% (+360bps), operating margin 30.4% (+440bps), operating income $615.5M (+30%). Gross margin expanded in ALL FIVE segments. Full-year guidance RAISED to ~$8.05B revenue and $10.00 pro forma EPS. The stock rose 12.61% to $294.83, an all-time closing high, and finished the week at $293.78. The line nobody printed: Garmin's own RAISED full-year guidance implies second-half EPS growth of 6.9% against the 29% it just reported, and a second-half gross margin of 58.5% against the 62.4% just printed. About $0.18 of the $0.51 beat was a one-off tariff refund ($21M) plus a $21M year-on-year FX swing. Outdoor — the highest-margin segment at 68.8% gross margin and 24% of revenue — is shrinking. The stock re-rated 21% in five sessions to an all-time high and 29.4x guided earnings. THE CALL: TRIM (3/5, A GREAT BUSINESS THAT JUST GOT 21% MORE EXPENSIVE) — base-case value ~$250.0 vs ~$293.78 today. KEY METRICS: - CALL: TRIM 3/5 — fair value ~$250 vs $293.78 (-15%). DCF: 2026E free cash flow $1.70B compounding at 9% for five years then 5%, discounted at 8.5% with a 2.5% terminal rate = enterprise value $41.73B, PLUS $4.37B of net cash, over 193.5M diluted shares = $238/sh. Bear $185, bull $322, probability-weighted 25/50/25 = $246. Multiple cross-check: 20x next year's earnings ex-cash plus the cash = $241. We round UP to $250 to respect a debt-free balance sheet. Note the BULL case at an 8.0% discount rate is $355 — above today's price, so the bull case is real, it is simply already paid for. - REVERSE DCF: at $293.78 the enterprise value is $52.47B — 30.9x 2026E free cash flow, 29.4x guided FY26 EPS of $10.00 (27.1x stripping out the cash) and 24.1x operating income. At an 8.5% discount rate that price asks Garmin to compound free cash flow at 12.8% a year for five straight years off a $1.70B base, while its own guidance implies second-half EPS growth of 6.9%. - STREET: Hold — 1 strong buy, 5 buy, 20 hold, 2 sell across 28 analysts. Average target $304, about +3.5%. But the analysts who actually updated after the print landed AT the stock: Barclays raised to $297, JPMorgan to $295, Morgan Stanley to $289 — below the current price. We ALIGN with the Street's neutral stance and go further: we DIFFER on the number and are more CAUTIOUS at $250. The gap is not the business — the Street capitalises earnings at ~30x; we discount free cash flow, which is $1.70B against $1.94B of net income because capex has doubled. - THE PRINT: revenue $2,022.1M (+11.4%) vs $1,814.6M, beating the ~$1.93B consensus. Gross profit $1,262.0M, gross margin a record 62.4% vs 58.8% (+360bps). Operating expenses $646.5M, up only 8.7% against 11.4% revenue growth. Operating income $615.5M (+30.3%), operating margin 30.4% vs 26.0% (+440bps). Net income $541.9M (+35.2%). GAAP diluted EPS $2.80 (+35%), pro forma $2.81 (+29%) — a one-cent gap. Effective tax rate 16.8% vs 16.5%. Diluted shares 193.471M vs 193.416M — FLAT. - WHAT THE $0.51 BEAT WAS MADE OF: revenue came in ~$96M above consensus, worth roughly $0.26/share — real volume, and the largest single piece. Then ~$21M of refunds of previously PAID tariffs, which Garmin names in the release as a driver of the gross margin: 104bps of the 360bps expansion, about $0.09/share, and non-recurring. Then FX: a $23.5M currency loss last year against just $2.5M this year, a $21.0M swing worth another ~$0.09/share. So roughly $0.18 of the $0.51 — 35% — is a tariff refund and the dollar. - THE GUIDANCE TABLE: FY2026 guidance RAISED to ~$8.05B revenue, $10.00 pro forma EPS, 59.7% gross margin, 27.0% operating margin, 16.5% tax. H1 actual was $3,775.6M revenue, 61.0% gross margin, 27.7% operating margin, $4.89 EPS. Subtract: implied H2 revenue $4,274M (+9.7%), implied H2 EPS $5.11 (+6.9% vs $4.78) against the +29% just printed, implied H2 gross margin 58.5% (390bps BELOW the 62.4% just printed) and implied H2 operating margin 26.4% against 30.4% printed. - SEGMENTS: Fitness $756.8M, +25%, gross margin 63.5% (+328bps), operating margin 36.6%, operating profit $277.0M — Fitness alone was 73% of ALL revenue growth and 55% of ALL operating-profit growth. Marine $341.4M, +14%, operating margin 29.2% vs 21.0% (+822bps), operating profit $99.8M. Aviation $268.7M, +8%, 75.2% gross margin, operating profit $72.2M. Auto OEM $172.4M, +1%, operating profit $2.9M vs a $9.5M loss. Outdoor $482.7M, DOWN 2% (down 3% in the half) — the highest gross margin in the company at 68.8% and 24% of revenue, blamed on the consumer auto and adventure watch (fenix) categories. - THE BULL CASE WE TAKE SERIOUSLY: gross margin rose in ALL FIVE segments — Fitness +328bps, Outdoor +268bps while its revenue FELL, Aviation +77bps, Marine +630bps, Auto OEM +555bps. Margin rising in a shrinking segment is pricing power, not mix. And Garmin sandbags: the last four prints beat by $0.27, $0.39, $0.24 and $0.51. If H2 is conservative by the same margin, FY26 EPS lands nearer $10.60 than $10.00 and the multiple is 27.7x rather than 29.4x — which is exactly why conviction is 3/5 and not 4/5. - BALANCE SHEET AND CASH: ZERO total debt against $4,370M of cash and marketable securities ($2,334M cash + $332M current + $1,704M noncurrent securities) — about $22.59 a share, 7.7% of market value. Total equity $9,029M on $11,424M of assets; goodwill only $748M. ROIC 18.8%, ROE 21%. H1 operating cash flow $939.5M (+58%), but H1 capex $194.4M vs $85.7M — up 127%, now running at 2.1x depreciation, so 2026E free cash flow of ~$1.70B sits BELOW the ~$1.94B of net income the guide implies. Q2 operating cash flow $404M, free cash flow $276M. - CAPITAL RETURNS: dividends of $202M paid in the quarter; the annual rate is $4.20/share approved by shareholders under Swiss law and paid in four $1.05 instalments (next payment September 25, 2026), a 1.43% yield. Buybacks are almost nothing by comparison — $43M repurchased in Q2, leaving $448M unused of a $500M authorisation that runs to December 2028. Diluted shares 193.471M vs 193.416M a year ago: flat. Zero of this quarter's EPS growth came from the share count. Founded 1989 by Gary Burrell and Min Kao (still chairman); CEO Cliff Pemble since 2013. What to watch: Bullish: Outdoor returning to revenue growth (24% of revenue at a 68.8% gross margin), or gross margin holding above 60% in Q3 against a guide implying 58.5%. Bearish: gross margin below 59% for two consecutive quarters, Fitness growth decelerating below 10% as the Forerunner cycle laps while Outdoor is still negative, or capex continuing to double against 11% revenue growth. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.