Has Garmin Lost Its Direction?

GPS maker Garmin (GRMN) was torched again Wednesday after reporting disappointing second quarter earnings before the open (GRMN Second Quarter Earnings Release).  The company reported earnings of $0.94 a share, excluding a $0.25 per share gain on the sale of some stock the company owned in another company, which is below analyst estimates for $1.00.  The company also lowered its full year outlook to EPS of $4.13 a share on revenue of $3.9 billion from EPS in excess of $4.40 on revenue in excess of $4.5 billion (GRMN Fourth Quarter Earnings Release, pg. 3).

Garmin makes those cool, or annoying, Global Positioning Systems [GPS] found in cars that tell people how to get where they’re going:

Make a left at Rosecrans.  Make a left at Rosecrans.  Thank You... Re-calculating route... Re-calculating route.

At least in concept, it’s a cool product that is useful to a lot of people who don’t want to be bothered with maps.

However, the stock, one of the hottest performers of 2007, has been completely torched this year (GRMN 2 Year Chart).  Sales growth, profit growth and margins are all declining. 

Despite this, the company is highly profitable and has $1 billion, or nearly $5 a share, of cash and marketable securities on its balance sheet and no debt.  When you back out the cash, it’s trading for about eight times this year’s forecast earnings.  That’s cheap for a company with the leading product in a hot market that is growing much faster than that.

The stock is almost universally hated at this point with 23 million of 216 million outstanding shares sold short.  The chart tells the story here.

It’s starting to get interesting to me.  Something doesn’t feel quite right to me, which is why I’m not buying yet.  It could be that its business is under so much pressure from the economy, competition and saturation that it still has a ways further to fall.  However, I’m paying attention.

Disclosure: Top Gun has no position in Garmin shares.

Comments

[Tom B:]

Standalone GPS units will not be able to compete with multipurpose devices (e.g. the iPhone)

2008 Jul 31 08:37 AM

[flatman:]

I am absolutely flabbergasted that everyone does not realize that smart phones are the killer of Garmin. It has amazed me since Nokia bought the mapping software company. What are these people thinking?? This application has been commoditized - one trick vendors will die.

2008 Jul 31 10:38 AM

[xz1:]

The PND used to use proprietary technology and now they all using off-shelf merchant chips. There is really not much barrier left. Look at Yahoo and Google maps, can anyone say it is inferior to Garmin's. It is much easier for Nokia/Apple to add GPS functionality than for Garmin to add phone capability. The latter require stringent telco qualification and the former need not. That has been confirmed by Garmin push-out of their Nuviphone. It won't be available until next year and iPhone is offering GPS capability NOW. Garmin has been squeezed into niche if not low-end market. They just lowered their guidance for the whole year. I would expect much worse Christmas season since by then most smartphone will have GPS capability.

2008 Jul 31 11:16 AM

[Archman Inv...:]

The products that Garmin makes fit into the "fad" department.
As usual, weak minded americans "get convinced" that they have to have the latest piece of junk if they want to be "in" or "a part of it".

Friggin morons. Just another thing for americans to waste their money on when they should be trying to get the savings rate above 0 % for a change.

That is why the top 10% of this country still controls 90% of it's net worth. People still have no idea what real assets are.

2008 Jul 31 02:10 PM

[dmj625:]

The iPhone threat is over-blown. The iPhone has no battery life with GPS on. The iPhone has to download maps and does not have automatic routing.
Garmin is more diverified than most people realize. Their real IP is in the routing logic. They make GPS devices for hunters, hikers, boaters, runners, cyclists, drivers, even GPS-enabled dog collars. Additionally, they are a major player in aviation and recently got FAA approval for a new $30,000 system that it touted as "revolutionizing" aircraft navigation. Oh yeah, they released the first detailed maps for China just in time for the Olympics. ...and those maps can be loaded onto existing Garmin GPS units. ...and there is currently no major player selling GPS in China...

2008 Jul 31 04:57 PM

[electric car:]

How would Garmin disbelievers like to ride in a plane, train, car, truck where the driver peers into a phone gps while driving and talking? Does not seem like a safe idea. This is not a one trick pony.

2008 Jul 31 11:34 PM

[samij:]

iphone threat might indeed be over-blown, but the fact remains that in consumer space, this functionality will be part of cell phones. however, there is a large market for gps devices in many professional applications, cabs, delivery trucks etc etc.

in this light garmins' nuviphone seems like a wrong bet, they'd do better strengthening their pro offerings and investing expanding in new markets, eg making solutions for emerging markets.

2008 Aug 01 04:50 AM

[JJJoseph:]

Garmin's FAA-certified GPS units are installed in hundreds of different models of _new_ aircraft around the world. It's the most popular avionics system in new general & business aircraft, and has been for several years. Because of the complex and powerful IP, Garmin's aviation & marine divisions are solid money makers. None of the other makers have this capability, not even close.

2008 Aug 13 06:08 PM