3 Reasons Garmin Ltd.'s Stock Could Rise

Garmin has been a great stock to own in 2014: Shares have rallied more than 22%, besting the broader market. Despite threats to its core GPS business, Garmin has been able to deliver solid results and return capital shareholders.

Despite its success Garmin shares could be headed even higher. Of course, it's important to note that there's no guarantee Garmin shares will rise -- a general market downturn could send shares lower even if Garmin's business is growing -- but each of the following scenarios is likely to be welcomed by Garmin shareholders.

Wearable growth continuesGarmin currently trades at a price-to-earnings ratio near 18, which is in line with the broader market, but may appear slightly aggressive for a company whose core business is contracting. Parts of Garmin, however, are experiencing growth, possibly justifying a higher multiple but as it stands now these divisions are small. In particular, its fitness wearable business has experienced rapid growth in recent months. Last quarter, for example, Garmin's wearable category saw its net sales rise by 44% on an annual basis.

If this growth continues at its current pace, Garmin could eventually be known more for its wearable gadgets than its GPS units. Exactly when is impossible to say, but if its core GPS segment continues to experience regular, 5% declines, and its wearable segment continues to grow around 40% annually, Garmin would derive more revenue from wearables than GPS units at some point in 2017.

That may be an optimistic forecast, particularly given the growing competition in the space. But if demand for Garmin's wearables can offset declines for its GPS units, shares could be headed higher.

It returns more capital to shareholdersGiven its valuation, Garmin is far from a value stock, but like a typical value stock, Garmin returns much of the cash it consistently generates to its shareholders. Currently, Garmin yields about 3.40% annually, and is on pace to return about $600 million to its shareholders in 2014 in the form of dividends and stock buybacks.

In October, Garmin announced that it had completed its current share repurchase authorization. In February, Garmin's management plans to revisit the issue, and could announce an even bigger repurchase program.

Garmin has given no specific details on its cash return policy, saying only that it would be consistent with recent years, but the company has the resources to return capital to its shareholders at an accelerated pace. Garmin has nearly $3 billion in cash and cash equivalents (about one-third of its market cap) and continues to generate more at steady pace ($202 million last quarter).

It's acquiredFinally, Garmin shareholders could benefit if the company were to be acquired. Although this is true for virtually any company, Garmin may be a particularly attractive takeover target given its expertise in two key areas: navigation and wearable fitness gadgets.

Talk of a Garmin takeover has been ongoing for at least seven years -- obviously, that hasn't happened, as the company remains independent. Moreover, analysts are skeptical of a deal: last month, Citigroup said that Garmin did not own enough technology or patents to entice a would-be acquirer.

Still, given the current trends in the mobile computing market, it is a possibility that cannot be entirely discounted. As companies, including Apple (Apple Watch), Microsoft(Microsoft Band), and Google (Android Wear), move ever more into the realm of wearable and fitness-related computing, Garmin's expertise and established fitness brand could prove enticing. It could be a long shot, and by itself, not much of a reason to buy Garmin shares, but Garmin shareholders would likely benefit if the company were put into play.

The article 3 Reasons Garmin Ltd.'s Stock Could Rise originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Microsoft. 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.

Copyright 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.