Garmin Will Recover When Tele Atlas Deal Is Done

Although Thursday was an abysmal day in general, I think Garmin (GRMN) deserves some special consideration at these levels. Following the news that their major source of map content, Navteq (NVT) was to be acquired, the stock took a nosedive and I posited that the stock was oversold. This was on Oct. 1. Following that post, the stock rose 15% within 4 weeks versus a flat S&P500 performance.

Following 3rd quarter earnings that beat street estimates, the stock is down appreciably again, this time due to its projected bid for Tele Atlas to fill its map-making void. Excluding the effect of foreign exchange rates, earnings climbed to 89 cents per share from 50 cents per share versus an 82 cent concensus. You'd wonder why the stock would react in such a manner. Merrill Lynch postulated that Garmin would ultimately have to increase its bid for Tele Atlas given a likely bidding war with Tom Tom.

Regardless, if Garmin ends up paying an extra several million, the stock will pop when the deal is done. It is the uncertainty that is depressing the shares, not the actual pain it will feel from the deal. This is no different than the enormous runup RIM (RIMM) saw when the patent lawsuit over its technology was finally settled. Although they payed a tremendous amount of money to settle a suit that some would argue was bogus, once that uncertainty was removed, a sigh of relief buoyed the stock.

Another recent example is the double digit increase in Vonage (VG) shares following their announcement on patent disputes. To add some additional upside potential, the Financial Times reported that there are some interested acquisitive tech giants, including Microsoft (MSFT), that may be eyeing Garmin given the current situation.

Disclosure: Still long Garmin. Sold half of initial position in September, but still holding.

Comments

[Tom B:]

I've thought about buying a GPS unit a few times, but every time I came away with the realization that Garmin units suck and they have little competition in the market. This doesn't look like a formula for success to me. Suppose the iPhone adds GPS-- Poof-- Garmin's gone overnight.

2007 Nov 02 01:21 PM

[hydeho:]

Instead of thinking about, perhaps you should do some research. I did and purchased a Garmin 350. Totally impressed with it and the company. Many users groups have nothing but praise for the Garmin GPS units.

2007 Nov 02 09:14 PM

[wixeywaxy:]

First I'm long also and will continue holding. Garmin is a good company with excellent management and organizational culture. That said I don't agree with your scenario. The pristine balance sheet Garmin possessed is gone and the growth and margins previously enjoyed are unsustainable with the consolidated organization, therefore we will see an adjustment in the price paid for earnings. The PE will do well to hold around 25 and given the expected $3.40 for 2007 there is likely so additional downside to expect. WW

2007 Nov 02 09:42 PM

[Everyday Fi...:]

Just to revisit the concept in this post, the stock bounced appreciably after bidding was done, as expected. Following that the stock has continued to run and stands at 103 as of today. I had reentered at 87 and sold half position at 100 yesterday. Not bad for a couple weeks' time.

2007 Nov 27 08:51 PM