Why Microsoft Should Seriously Consider Buying Garmin

 |  Includes: BFR, CRRC, GRMN, MSFT
by: Yieldpig

We usually stick with something macro, historical, silly or philosophical in these posts, but in doing our work on Garmin (NASDAQ:GRMN), we started thinking a little more.

According to a quasi-exhaustive, ten second Google search, fall 2007’s big rumor was that Microsoft (NASDAQ:MSFT) was going scoop up GPS peddler Garmin. Obviously, nothing came to fruition. After doing a little work on both, maybe it’s time to bring that chatter back. We will be completely forthright, like Sgt. Schultz from “Hogan’s Heroes,” vee know nussssing!

GRMN’s numbers look interesting. According to Standard and Poor’s, where it is ranked a “hold,” the company has no debt and is sitting on $1 billion in cash and marketable securities. The company’s return on invested capital has exceeded 20% every year over the past decade. Pretty strong in anyone’s book. Best Buy sells the snot out of their products generating 13% of retail sales in 2009. Throw in a single digit P/E and a dividend yield in excess of 4% and the fact that no one has snatched the company up yet is a head scratcher.

But beyond the perfect facade, there are issues. Not like "psycho date, getting drunk and making out with the baseball team AND the chess team in the same night" issues, but red flags nonetheless. Despite the 10-year stellar growth rate, the future is less certain. Mobile phone makers and network providers are providing mobile navigation free (thank Google among others). Phones and automobiles are increasingly coming with NAV systems as standard equipment. Analysts agree that revenue and earnings will decline over the next few years due to increased competition. So why not sell now before the sledding gets rough? Tart yourself up and maybe someone will come sniffing around. Microsoft should sniff.

Trading at around 13 times trailing earnings and yielding a little better than 2%, MSFT reminds me of a stock my grandmother would own if she were alive. Bubbe was a fairly shrewd stock picker. MSFT also has thing for cash and currently has nearly $30 billion in a Costco-sized warehouse somewhere in Redmond, WA. And Microsoft really should do SOMETHING. While Apple’s (NASDAQ:AAPL) star is a bit tarnished thanks to whatever the deal was with the iPhone 4. (I’m a BlackBerry, used to be a Samsung flip phone, person so I really don’t care what’s going on with your iPhone.) Anyway, while Apple has yet to repeat its brilliant performance of the early 90’s when they decided to keep the OS and the software within the MacCult, I have a hunch they will; they’re still the Jack Kennedy 1960 to Microsoft’s Nixon. And we all know that the chicks dug Kennedy.

So what does the once mighty Microsoft do? The eventual answer would be “buy Yahoo (NASDAQ:YHOO),” but we’re talking about Garmin. Garmin would be a kind of a niche purchase. However, it would give MSFT some street cred in that navigation space where everyone likes to see how many times they can say “Google Earth” with a mouth full of crackers. They’ve tired semi-successfully to be a hardware company, so this would afford them the opportunity to sell some hardware that people actually want, save for the Xbox. The Garmin brand would help Microsoft get a better toe hold in the mobile market. Come on…mobile phone? Navigation? Makes sense.

The mechanics of the deal would make sense, too. Granted, we’re probably oversimplifying, A $5 billion acquisition by a $223 billion company that has $30 billion in cash isn’t going to give Steve Balmer a hernia anytime soon. Besides, you could turn around and put the $1 billion of cash back into the kitty.

Microsoft buying Garmin isn’t a totally whack idea and could work. The Zune didn’t work. Bing really doesn’t work. Maybe this would. Consider our rumor started.

Let’s see if we can find our way to this week’s three lil’ piggies.

“Take a left at Albuquerque…”

Garmin Ltd Plc (GRMN)
Recent Price: 29.91
P/E: 8.67
Current Yield: 5.01%

The Skinny

A 5% yield? What’s so piggish about that? Well, when the product is in a bazillion rental cars, is pretty much synonymous with the letters “GPS,” used to be a $125 stock and gives you tech exposure, we notice. You probably know GRMN. If you’ve got an aftermarket GPS in your car or on your boat, you’re intimate with the product. For those that aren’t, GRMN provides navigation and communications devices for the aviation, marine, automotive, wireless, and OEM markets. But the numbers tell the real story. 8x’s trailing earnings is cheap for a company with no debt and $1 billion in cash. Yes. $1 billion in cash for a $5 billion dollar market cap company. All of these factors rolled up make GRMN a compelling idea. Incidentally, the $125 peak was reached in 2007 when everybody was pimpin’.

The Danger

I’ll confess, I came late to the smart phone party (I waited for “the deal”) and chose a BlackBerry over an iPhone or something on the Android platform. Getting ap-happy, I downloaded a free ap called Life Inpocket. The main feature was the nav system and the GPS. Free. Already have the hardware. In our opinion, that’s the biggest challenge GRMN faces thematically. It seems that everyone’s castle walls are threatened by the legions of Google (NASDAQ:GOOG). GRMN has felt this as sales declined 15% last year. That’s a healthy lick. While a good portion of that came from losing share to smart phones, you might as well blame it on the crappy economy as well.

“Book ‘em…”

Courier Corp (NASDAQ:CRRC)
Recent Price: 14.00
P/E: 14.42
Current Yield: 6.3%

The Skinny

According to the company’s website: “If you ‘ve bought a book a book lately, there’s a good chance we made it.” That’s probably a true statement. CRRC is the nation’s third largest book manufacturer producing over 175 million books last year. They have two main lines of business: book manufacturing and specialty publishing. They’ve carved out a successful niche by focusing on the educational, religious and specialty publishing markets which have a higher growth rate than mainstream, commercial book publishing. It’s an old company, tracing its roots back to 1824 and dividends have been paid since 1919. Lately, the company has been reducing long term debt. With a low to mid teens multiple and at 1.2 times book, CRRC is a quiet, interesting little story.

The Danger

Earlier this week, Amazon (NASDAQ:AMZN) announced that Kindle download sales have now outstripped regular book sales. When’s the last time you bought a CD? Exactly.

Last year, CRRC’s sales declined by 11% last year. The return on equity is unimpressive as well trending in the single digits over the last five years. The average daily trading volume is around 47,000 shares. Not bad. But not exactly GE-style liquidity. But the opening comment is still the biggest risk. Anyone who prints ink on paper should be very afraid.

“Jah…zee money ees in Argentina!”

BBVA Banco Frances ADR (NYSE:BFR)
Recent Price: 7.00
P/E: 5.43
Current Yield: 9.45%

The Skinny

OK…the fugitive Nazi jokes about Argentina never get old, at least around here. And we know we’ve discussed a few Argentine names in the past. A pattern? Maybe subconsciously so we can do the fugitive Nazi bit (please keep it in context…like Mel Brooks said one time: “Look…they didn’t mean to be…but the Nazis were funny.”) OK…about the stock. BFR is the Argentine subsidiary of Spanish banking titan BBVA. While anything south of the border can incite panic and anything associated with a PIIG country gets the same reaction, maybe a little nibble is all right for speculation. The stock’s cheap with a single digit multiple. Last year’s ROE was around 28%. Strong in anyone’s screen. Most encouraging was Q1 net income was up 85% YOY. Long an urbane, developed South American nation, Argentina stands to benefit from Brazil’s growth driving.

The Danger

We’ve said it before: it’s an Argentine bank. Argentina’s probably got a patented system on sovereign debt default which ruins its banks as a nasty byproduct. That is always a possibility when investing in Latin America. While the company can trace its roots back to 1886, its present incarnation has only paid dividends since 2006. So, don’t get used to that big fat yield. Being the child of a huge Spanish bank, BRF is susceptible with the problems brewing in the European theatre and there’s more to come. Also, trading volume is a wee bit thin for a billion dollar market cap. And the standard international investing caveat: it’s different other place, transparency, taxes, political risk, currency risk, blardy blardy blar. Like mom said, look both ways before crossing the street.