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We recently wrote about several stocks playing in the smartphone arena (AAPL, RIMM, GOOG]) but left Garmin out of the discussion (they announced they'd exit the smartphone market in fall 2010). Garmin's poor showing in the smartphone market did ostensibly punish the company—it is currently selling for less than 9 times earnings, while in years previous to the downturn it seems to have fluctuated between 16 and 25). We considered this and wanted to know if Garmin is being overly punished—in other words, is Garmin at this price a Value Stock or a Value Trap?

Using our software and the analysts' projected 5 year growth rates, we get the following (click to enlarge images):

At the current projected growth rate of 9%, it looks like GRMN is selling at a very big discount to the intrinsic value. The analysts do not seem optimistic about GRMN's prospects over the next couple of years, projecting a 2011 EPS of 2.56, or 27% drop from 2009's $3.5. We wondered what GRMN's valuation would be if we factored in the lower estimates for 2011. We then input the estimate of $2.56 as the current EPS, and made a ballpark estimate of FCF/share of $3.0 (in the range of FCF/share in 2006).

This new data gives us the following:

With this data, GRMN seems to be selling much closer to intrinsic value. In addition to this valuation, we should also consider that GRMN pays a dividend, currently with a yield approaching 5%.

The investment return analysis gives us the following:

GRMN seems not to have a problem with running a profitable business; the ROIC, even with the current economic downturn, has stayed above 20%.

The debt and liquidity analysis gives us the following:

With no significant debt to speak of over the last 10 years, GRMN has been able to fund their failed venture into smartphones without issuing significant debt. Their high current and quick ratios do not raise any flags.

In summary, the fundamentals of GRMN seem pretty solid, even considering their poor showing in the smartphone market. To answer the question whether GRMN is a value stock or a value trap you need to consider the growth assumptions when GRMN re-focuses on their core market of GPS devices. If they can manage to grow more than the projected 9% per year, and if they can keep up the dividend payment (or increase it), there is a good case for calling GRMN a value stock.

Disclosure: We have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Garmin: Value Stock or Value Trap?