Could This New Addition to The S&P 500 Also Be a Good Addition to Your Portfolio?

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

GPS maker Garmin (NASDAQ: GRMN) will officially be added to the S&P 500 on Dec. 11 after the bell rings. The commercial printer RR Donnelley (NASDAQ: RRD) will be cast out of the club to make room for Garmin. RR Donnelley, not to be left out in the cold completely, however, will be added into the S&P 400 MidCap Index, because the company's "market cap is more representative of the mid-cap market space," according to S&P Dow Jones in a press release. So, with the recent news, what does it all mean for Garmin?

The company reported its Q3 results on Oct. 31, reporting relatively strong revenue growth. According to the company:

"Gross margins improved to 53% in the quarter. Operating margins also improved to 24% from 22% in the prior year as operating expenses were essentially flat. Revenue growth combined with improved margins resulted in both operating income and proforma EPS growth. Operating income for the quarter grew 9% to $160 million while proforma EPS was $0.74, a 4% improvement over the prior year. We sold approximately 3.7 million units in the quarter, which is up 7% year-over-year as Auto OEMs and Outdoor volumes increased."

Garmin has also announced that they will be raising their full year proforma EPS guidance after considering their third quarter results.

Valuations:

Garmin looks reasonably valued at first glance, so lets dig a little deeper into the company.

The Aviation, Marine, Outdoor and Fitness segments contributed 43% of the total revenue mix for the company, and 59% of the total operating income for the quarter. 

The company's Aviation segment showed promise, and is one of the company's best shots for future expansion and growth. The company saw revenue in its aviation segment grow 3%, with six announced cockpits planned for delivery in the coming year- which should help generate and sustain new revenue and growth in the upcoming future. The company is also investing more into its aviation segment, explaining that:

"During the quarter, we announced two additional cockpit wins that highlight the progress we are making to expand our presence in the OEM market. Just this week, Cessna announced that our G5000 integrated flight deck has been chosen for the upgraded Citation Sovereign. And early in the quarter, we announced a new relationship with AgustaWestland, who selected a G1000H for updated 119 model helicopter. Both the Sovereign and the 119 are scheduled for certification in 2013."

The aviation business should be lucrative for Garmin going into the future, and the company would be wise to evolve into more of an aviation-related OEM provider. Auto and outdoor volumes increased as well, with YoY sales rising 7%. The marine segment was the thorn in the company's side at the end of their most recent quarter. A decrease in revenues by 7% was blamed on the weak economy, but the company also elaborated that higher gross margin and gross profit helped to "more than offset the impact of lower sales."

Conclusion:

Garmin is remaining profitable overall and its strengthening aviation segment should provide the company with future growth. Although they may not be the most exciting company to invest in, they are extremely healthy financially with a rock-solid balance sheet. 

The company has an abundant amount of cash and continues to generate cash, while keeping debt almost non-existent. The company also pays out a nice income generating dividend, at a yield of around 4.5%. The company has lacked significant catalysts to propel its stock price upwards in the past, but the high-yield dividend has also been a nice present for waiting investors.

The stock recently shot up 6%, which presumably had something to do with its addition to the S&P 500. Garmin being included into the S&P 500 should give the company some nice continued capital appreciation, because the company will now gain exposure to many ETFs- including the SPDR S&P 500 ETF (NYSEMKT: SPY), which is the largest ETF in the world. Garmin hasn't been included in hardly any ETFs in the past, but will now finally be getting some instant attention, which should provide a much needed catalyst for the company's stock going forward. 
 





Jharry1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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