Garmin's Success Attracts Competition -- Can the Company Continue to Grow? (GRMN, LPL, SNE)

Garmin (GRMN) has been one of the most successful consumer electronics companies of the last couple of years, as evidenced by its share performance. The company is a leading provider of the GPS navigation systems that have become increasingly more popular in recent times.

According to Standard and Poor’s:

We think the personal navigation device market is poised for mass consumer adoption, and believe Garmin, as a market leader, is in a prime position to capitalize on the upswing. According to the NPD Group, Garmin maintains about a 50% market share for personal navigation devices sold at retail in the U.S. We see broader consumer adoption of PNDs driven by three factors: lower prices, technology that makes PNDs “must-have” items, and greater consumer awareness.

GRMN 2-yr chart:

However, Garmin’s success is breeding new competition, as evidenced by the following Reuters story.

Philips Electronics (LPL) said it would begin making mobile personal navigation systems to tap into their growing popularity, hurting shares of route-finding market leader TomTom.

Europe’s biggest consumer electronics producer will compete directly with Dutch navigation device maker TomTom by introducing a new line of three products from September and October in Germany, France and the Benelux countries starting at 400 euros ($500).

Shares in TomTom, which has a market share of around 50 percent in Europe, were down 3 percent to 30.55 euros.

“This will contribute to the commoditisation of these products. You can already get entry-level devices from reputable brands for as little as 199 euros. Profit margins are due to come down,” said analyst Marc Kennis at Bank Van Lanschot, who rates TomTom a “sell” with a share price target of 25 euros and Philips a “buy” with a target of 30.50 euros.

Philips is not the first mainstream consumer electronics company to have discovered the market for standalone navigation devices. Japan’s Sony (SNE) entered the European market earlier this year after specialised niche players such as TomTom and Garmin created a booming industry.

Both Garmin and Sony have said they want to grab 20 percent of the European navigation devices market. The overall market in Europe and the United States is expected to roughly double to well over 9 million units this year.

Garmin and TomTom have managed to create well-known niche brands, but Philips and Sony have brand recognition as well. As more and more players are attracted to the market, margins will have to come down and the growth will be split up among a number of players. While Garmin’s valuation (recent P/E multiple of 29x) is not insane, we wonder if it can hold up if growth slows down in the coming months.

To be fair, S&P sees this coming:

A major risk to our recommendation and target price, in our view, would be faster-than-anticipated operating margin compression. Success in the personal navigation device space is inviting competition, which we expect to drive product prices, and therefore Garmin’s operating margin, down. Factoring in operating efficiencies, we anticipate as a result of economies of scale, we have modeled-in operating margin compression of 300 bps for both 2006 and 2007.

The last remaining question is, do investors see it coming?

GRMN-LPL-SNE 1-yr comparison chart:

Comments

[Ron Belt:]

William, this is in my view a classical "inside the tornado" industry at present. I wish Sony and Philips a lot of luck in their efforts in catching up with the category leaders. With respect to growth, take a look at the simple exercise that I've done on keyword search:
beleggen.blogo.nl/blog...

Looks to me that this is going to be yet another great Q!

2006 Jun 23 05:15 PM

[William Trent_:]

If you add "GPS" to the Google Trends search, it gets a far higher return than either TomTom or Garmin. To me, that suggests that consumers might not care so much about the industry leader - they just want the device.

2006 Jun 23 10:43 PM

[Ron Belt:]

Time will tell.. but I'm willing to put a bottle of champagne on the line and bet you that tomtom is larger (revenue wise) than Garmin in Q2 already ;-)

2006 Jun 25 02:53 PM