Getting Bearish on Garmin: We're No Longer the Only Ones (GRMN)

Jul.14.06 | About: Garmin Ltd. (GRMN)

Normally by the time the big newswires pick up on a business story, it has already run its course. Thus, we were surprised to see this mildly bearish take (in line with our own) on Garmin (NASDAQ:GRMN) while the stock is still near its highs. The contrarian in us now wonders whether the story has more legs.

The piece, which appeared on Yahoo! Finance today was titled Garmin Tries to Navigate Mass Market and had the following to say:

As Garmin continues to move its products — and particularly its fast-growing line of automotive-GPS devices — into discount retailers like Wal-Mart Stores Inc. and Target Corp., prices will drop. The growing concern on Wall Street is that the retailing move will weaken Garmin’s profit margins.

“If Garmin chooses to cut prices, growth expectations may be met, but profitability is likely to suffer,” Bear Stearns analyst Peter Barry said. “If, on the other hand, Garmin sticks to their premium-pricing model, it is likely that its market share will erode.”

The GPS market, as analyst Barry noted, has swollen by 23 percent annually, totaling an estimated $23 billion in 2005. The car systems are thought to account for about one-third of the market. No surprise, then, that Garmin’s automotive division has become its star unit. In the latest quarter, its revenue soared 252 percent to $150.7 million. This year, Garmin expects to sell twice as many personal navigation devices as a year ago, and growth in the automotive division is seen reaching at least 75 percent.

Despite these encouraging statistics, some analysts worry how Garmin will fare as the auto market — now the source of nearly 50 percent of its revenue — becomes even more crowded. Garmin dominates with roughly one-half of the North American market, but faces challenges from a slew of overseas rivals, including TomTom NV of the Netherlands.

Of course, with TomTom’s recent stumble, it will be easier for Garmin to sustain its position. Last week, we reported on the earnings miss at digital navigation leader TomTom, which the company blamed on logistical issues, as reported by Reuters:

TomTom declined to say which component had caused the problem, but added that it was a logistical mishap that could not be blamed on its Asian contract manufacturer or suppliers.

“We can’t blame any of this on Quanta,” TomTom spokesman Taco Titulaer said, referring to its Asian contract manufacturer.

Now the story appears to be shifting. DigiTimes reports that

Quanta Computer will lose its only client in the GPS market, TomTom, because of defects in the navigation devices the notebook maker has made for the Netherlands-based firm, according to the Chinese-language Commercial Times.

Anybody got some juicy low-down on this one? With holiday sales coming and Sony (NYSE:SNE) and Pioneer joining the GPS fray, could TomTom be in more trouble than they let on? We know Garmin sure hopes so.

GRMN 1-yr chart:

GRMN 1-yr chart