Garmin Sell-Off Overdone; Wait For the Dust to Settle

Yesterday, with the announcement that map maker Navteq (NVT) has been acquired by Nokia (NOK) for some $8 billion, Garmin's (GRMN) shares took a hit on the chin. GRMN lost 10% of its value, shaving more than $2 billion from its market cap (shares are down another 6% late in the trading day today). I think this is a classic case of panic gripping the street, leading investors to shoot first and ask questions later.

Garmin stock has been a darling to investors for the past few years. The stock had risen more than 100% in the past 6 months. With 2007 Q2 EPS rising 75% over last year's Q2 and the number of units sold rising a whopping 99% over the same period, the rise in share price is partly justified. But the price more than doubling in just 6 months is bound to create a lot of holders waiting for an excuse to sell at the first semblance of possible bad news. This is exactly what happened yesterday.

Navteq supplies the maps Garmin uses in its GPS devices. Earlier this year, TeleAtlas, the other map supplier in Europe, was acquired by Garmin rival TomTom, creating a vertically integrated company. That deal had lead to a lot of speculation, that Garmin would also try to integrate vertically and acquire its map supplier Navteq. So once the news hit the wires that Garmin is out of picture for buying Navteq, the shares took a dive.

After being acquired by Nokia, Navteq is not going to stop supplying maps to Garmin. This is evident from the news release of the acquisition. Anti-trust laws also would prevent them from doing so. So from a near term perspective, this event does not impact Garmin's business.

Having maps in mobile phones is nothing new. IPhone already has them. Many of the RIM (RIMM) Blackberrys have them. But at this point, comparing the mobile phone maps to the Garmin NUVIs is like comparing a Kia to a Lexus. The NUVIs host a lot more features and I just don't see someone doing away with it just because he has maps in his mobile. So yesterday's drop in share price cannot be attributed to a "new" finding that mobile phones will have GPS / maps.

Also, even if Garmin had bought Navteq, on the basis of the same anti-trust laws, it would have had to sell maps to Nokia or other mobile providers. So the mobile phone threat would still have remained intact. Another reason, why yesterday's selloff doesn't make sense.

After the TeleAtlas acquisition by TomTom earlier this year, Garmin must have definitely explored the idea of buying Navteq. But on the basis of the above two points, they must have realized that why should they tie up their capital in an expensive acquisition if they are still going to get the maps from the same company, regardless. Maybe thats why they passed on buying, beyond a certain price.

From a bit of a longer term perspective, Garmin's thrust will be in Auto & Aviation. Only 25% of new US autos currently come with GPS systems. Eventually, this will become close to 100%, just like a CD player is in almost every new car today. Also, auto-GPS systems have not even scratched the surface in fast growing car markets like India and China. So there is huge potential still left.

In the aviation segment, which is growing at around 40%, Garmin is making inroads into cockpit GPS systems. Recently, two aircraft companies announced of deals to start using G1000 system in the cockpits of their planes. This is a sector where Nokia or Chinese knockouts cannot compete easily with Garmin. Another area of aviation where Garmin is going to have a lot of potential is the conversion of Air-Traffic control from the outdated radar based navigation to the new GPS based ADS-B systems.

Looking at all these factors, it's clear that the selling of shares yesterday was way overdone. Panic, fear and excuses for taking profits all contributed to the price decline.

The shares having gone up too much too fast in the past 6 months, I am not sure if this is a good entry point. But within a few months, once the dust settles on this news and Garmin comes out with 2007 Q3 earnings figures, I can see myself licking my chops once again from the shares I bought earlier this year.

Comments

[stock investor:]

insightful :)

2007 Oct 02 11:10 AM

[TraderMark:]

Agree. Have restarted a position here around the 50 day moving average of $100

www.fundmymutualfund.c...

As with all lemmings, I mean... investors... overreaction to the upside and downside.

2007 Oct 02 08:21 PM

[Bead Trader:]

I agree totally, Navtec at 50 time earnings and using 8.1 Bil in capital would have made me a seller not a buyer of GRMN. The failure to purchase NAVTEC is a positive business move for GRMN. Another lot of GRMN has been added to my portfolio at this point. Over twice the cost of my original shares and still a good buy.

2007 Oct 04 12:10 PM