While the following list isn’t meant to be exhaustive, it should serve as a good starting point for those who agree with me that GPS-enabled device growth is just getting started.
The below chart, which was produced using StockVal, gives some of the metrics I find important for four publicly-traded pure-play GPS-related stocks. One can make a few generalizations: First, as a group, these four stocks slightly higher PE valuations than the overall market but have significantly higher historical and expected growth. Second, the balance sheets are essentially free of debt and loaded with cash. Finally, performance over the past year has varied greatly, suggesting that the “group” isn’t really a group and requires research specific to each name. Not discernable from the table above, these companies tend to face smaller, privately-held competitors and have frequently made technology-based acquisitions.
Looking at each of the names ranked by Y-T-D return, one can see that each of these companies is quite different. SiRF Technology Holdings Inc. (SIRF) is a fabless semiconductor company, a technology leader. The stock has been dogged by fears of competition, as its customers have been adding second-sources for their lower-end models. It is engaged in patent litigation with competitor Global Locate and is rumored to have recently lost some business to MediaTek.
I think that the bull case is driven by overall growth in GPS and especially in cell phones (ex-QCOM). The competitive advantage that the company has revolves around its chip-set solution and higher quality. I am concerned that I may be improperly viewing this company as more like NVIDIA Corporation (NVDA) than a Cree (CREE) or SanDisk Corporation (SNDK).
All of these are leading niche-oriented semiconductor companies focused on high-growth areas (graphics, LEDs and flash memory, respectively). NVDA, like SIRF, enjoys a market with high unit-growth but only modestly negative price growth, while the other two face continually falling prices. SIRF spent about 30% of sales last year on R&D, investing in the maintenance of their technology leadership.
CREE and SNDK both have to spend substantially on improving manufacturing processes in order to stay competitive. Their R&D spending is not what differentiates them: Cree spent about 12%, while SNDK spent 9%. On the other hand, CREE spent a massive 18% of sales on CapEx. SNDK, at just 5%, appears to have not spent that much because they have a JV and the spending isn’t reflected in their cash flow statement. Clearly, though, the flash memory business is highly capital-intensive. SIRF spent less than 2%.
This is the company I know best of the group, as the disclosure below indicates I own shares. Clearly, lots of folks don’t agree with me, as the short-interest was still 14% of the float despite a large reduction after they reported their Q4 and raised guidance. I would characterize the technicals as positive, with the 150dma heading up and good volume-based support in the 27-28 area.
I have also followed Trimble Navigation Limited (TRMB) very closely. They are a vertically-integrated provider serving engineering/construction, agriculture and other non-consumer markets. I think that these markets are going to grow, just not as rapidly as the more consumer-oriented areas. While I am focused more on the growth of cell phones and PND, one might also consider that the markets TRMB serves have been very strong already and could slow (though TRMB penetration will still increase). TRMB has about ½ its sales outside of the U.S.
While I have no position, I do like TRMB long-term despite its higher valuation based on PEG ratio. Their competitive situation is probably the best of the group. Technically, the stock is in a 4-yr uptrend, with strong support in the 24-25 area. They recently completed the acquisition of @Road (ARDI).
Garmin (GRMN), a big customer of SIRF, is focused upon selling GPS-related devices into the Mobile/Auto, Marine, Aviation and Marine markets. Most readers are probably familiar with their primarily consumer-oriented products, which represent 78% of sales. The stock has had a great run since the market bottomed in late 2002. 10% of the shares (float) are shorted, as the bears are clearly focused upon increasing competition from Tom-Tom and others. It is worth noting their low tax-rate and Grand Caymans incorporation. Insiders own a very large part of the company – 41%.
The company has clearly a great brand and is participating in several high-growth markets. Their biz model includes subscription revenue, which could help smooth out some of the sales variability as the company matures. With that said, I don’t think that their exposure to the most attractive market (in my opinion), cell phones, is the greatest. They do sell products that connect to phones and Blackberries through Bluetooth, but I think that the real growth will come from Nokia (NOK) et al embedding GPS in the phone so that we can track our kids (among many applications). I would love to hear from those who know the company better in order to understand the leverage to cell phone GPS proliferation.
The stock clearly reflects the expected slowing of growth, as the PE is now at a 20-month low. The stock looks technically sound, recently bouncing off of high-volume support in the 50 area. I would expect that the company will do well despite the increased competition.
The final company is one that I don’t follow at all. Novatel (NGPS), based in Canada, is focused exclusively on commercial applications and competes directly with TRMB. With a ton of cash, a below-market PE, and nice generation of FCF, this one is probably worth a closer look despite its lack of exposure to the principal market driver that I envision. Their earnings estimates have come down sharply (expected to be flat this year), something I intend to investigate. They are covered by just 7 analysts, all of which are Tier-2 or Tier-3.
From a technical perspective, the stock recently tested the lows of the past year. The uptrend that commenced in late 2001 appears to be at risk if the stock doesn’t rebound soon. The very recent sharp decline and rebound appears to be related to the announcement of a merger between a competitor and a JV partner.
Disclosure: The author has an investment in SIRF.