Last week it was announced that Garmin (NASDAQ:GRMN) would replace R. R. Donnelly (NASDAQ:RRD) in the S&P 500. R. R. Donnelly is a printing company with flat revenues over three years. Some might say it is going to be obsolete eventually.
I can't tell which company is more irrelevant: Garmin or R. R. Donnelly? When your main product has superior substitutes (i.e. mobile phones with turn-by-turn navigation) why do you stay in business? How do you stay in business? You have to 'diworsify'. Garmin depends on selling navigation equipment to boat owners and plane owners. It also has a fitness division, whose relative success is a mystery to me. Why would anyone buy a Garmin watch? It's not a respected brand name in watches and the price points are too high.
Management recently changed the way they recognize revenue from personal navigation device sales, which boosted revenue by $70 million. Before the accounting change, they recognized revenue from a hardware sale immediately but deferred the revenue they attributed to software over 36 months. Now they are recognizing hardware and software sales immediately. I view this as a cheap attempt to boost Garmin's numbers.
Also, if I recall correctly from one of the conference calls, management began shifting operating expenses from their non-PND business to their PND businesses to make it seem like they have a promising future after PNDs are long gone. Basically they may be boosting results of the fitness segment (watches), outdoor segment (walkie talkies), marine segment (fish finders, depth gauges) and aviation by shifting their operating expenses to the dying business.
One big risk to shareholders is that Garmin sells most of its products to retailers than directly to end users. I have observed over the years that this usually blinds the market to picking up on obsolescence until it's too late. Specifically, I caught Logitech (NASDAQ:LOGI) and Rosetta Stone (NYSE:RST) before sales dropped dramatically.
Another warning sign is that multiple officers are selling a large number of shares under 10b5 trading programs. The programs seem to be selling at roughly the same prices and after movements above $40.
My opinion is that GRMN should not be trading at 2.5 tangible book value. I think a market cap of $5 billion would be more reasonable for this obsolete company.