Garmin in Free Fall - Here's the Big Picture

Jan.10.08 | About: Garmin Ltd. (GRMN)

Garmin (NASDAQ:GRMN) was in total free fall, down 13% Wednesday morning, to $69 on an analyst downgrade.

  • Shares of Garmin Ltd. fell in premarket trading Wednesday after a Deutsche Bank analyst downgraded the navigation device maker's stock, saying competition is likely to increase and rival TomTom NV may cut prices to take market share.
  • Jonathan Goldberg downgraded the stock to "Hold" from "Buy," and cut his price target to $90 per share from $125. Based on conversations with Garmin and TomTom representatives at the annual International Consumer Electronics Show, Goldberg said Garmin's future is less certain than it has been in recent years.
  • "TomTom management came across as being more aggressive about their plans in the U.S. this year, causing us to question the pricing discipline displayed so far," he said.
  • Although its results in the next few quarters should be good, Goldberg said Garmin is reporting slower growth in some European Union markets, including Germany.
  • Under current market conditions, he said, the uncertainty about prices and sales means the stock no longer deserves its prices from late last year, and should stay around its present levels.
Folks, I have to agree 100% with this assessment, although the current move is probably a bit overdone. I did hold Garmin (GRMN) ever briefly in the fund during the Navteq/Nokia situation, but this was more of a short term trade due to Christmas and I have never been a big believer in this type of commodity situation. During a secular growth story that GPS has been (going from nil to a cool "must have" consumer want), you can really make a lot of money when you get in the earlier stages. But eventually the story ends (by end I mean "growth slows" - and again perception is reality - even if perception is growth is slowing thats when the party ends). I wrote in [Restarting Position in Garmin (GRMN) in Selloff]

Takeaway: Garmin is not my favorite name - in the end its a hardware stock whose gross margins will come under attack as it becomes commoditized (in due time). It's a matter of when with this stock.

Again, at some point the party for Garmin ends, and margins will compress so this stock should trade at some discount to growth rates - but at this level it seems the discount is too great. At least in my eyes; and especially with the holiday season approaching.

I have never held this stock in my personal account for this reason and in fact have watched with a bit of awe and wonder and how this stock is treated so "well" over the past few years - as if it is an Apple (NASDAQ:AAPL) type. Again, hardware companies are commodities and price competition will eventually ruin margins. It was just playing Russian Roulette with this type of name, eventually the "bad day" will come. Yes, Apple is in many ways a hardware company but as I keep repeating it is has a cache, design, and style that allows it to charge premium pricing [Apple the Cultural Icon], along with new businesses (phone subscription, iTunes) that have non hardware qualities.

If you have a portfolio of 10 names and this is one of them, a move like Garmin is putting on now can ruin a good year very quickly. People are very apt to throw all "technology" together in one bucket, or even "technology gadgets" all together - you can't do that or you will lose money sooner or later. I actually hold very few technology names as it is hard to find a defensible moat in this sector - but in general the ones I do hold have such a thing, or at least are in much earlier stages of their life cycle. My last sale of Garmin was $95 in mid November, not 2 months later the stock is down nearly 30%. Compare that to a performance of Apple for example... even with all the market strife, it was $160s in mid November, and $170s today.

Again let me repeat, perhaps this move is overdone, and Garmin will eventually retrace and make some gains. But in the long run with so many good stocks, in so many safer sectors (compare this situation to fertilizer), why bother? This is why I dropped Akamai Technologies (NASDAQ:AKAM) very early in the fund life - why bother with this level of risk? There probably is some good value to AKAM as well, but why battle it out with voracious shorts on this position when there are so many sectors and companies with 'relative' clear sailing.
Disclosure:Long Apple in fund and in personal account