Why I Prefer TomTom Over Garmin

For me, the highlight of yesterday was the tanking of Garmin (GRMN). GRMN lost some 21% in value.

It now trades at $35 and change. A lot lower than the $125 that it hit in November 2007, and financially, their numbers were better than ever (see conference call transcript).

So, what is it that caused GRMN to be worth 21% less yesterday than it was Tuesday? In a word, NuviPhone - their fancy gizmo phone with GPS built in. In my opinion, it is not a good idea .

Why? Because most phones can do some form of GPS already - whether the phone uses a proper SIRF chip to receive GPS coordinates from satellites, or just "triangulates" from the cell towers it can "talk" to. Apple's (AAPL) iPhone has GPS built-in [the software will get better in a hurry].

Let's compare GRMN and TomTom's (TMOAF.PK) Q2 2008 vs.Q2 2007.

1. Gross margins. TomTom had gross margins of 46%; Garmin, 45%. Add TeleAtlas, and TomTom actually had gross margins of 50%. As TeleAtlas' market penetration improves, TomTom's margins will improve. Garmin's gross margins were 50% in 2007 and TomTom's were 54% [pro-forma including TeleAtlas]. From now on, all numbers will include TeleAtlas.
2. Sales. GRMN had sales of 912M and TomTom's sales were 485M Euros = $776M. Garmin's PND sales were $751M [I included auto and personal/fitness and excluded marine/aviation].

Conclusions

1. TomTom's profit margins on PNDs [85% of sales] is far superior to Garmin's gross margins on PNDs. Tom2's gross margins on PND's was 42%, and for GRMN, it is 23.3% [I calculated the 23.3% from GRMN's earnings report [175M/751M].
2. TomTom owns TeleAtlas, which has 85% gross margins, a heady growth rate, and an agreement to sell maps to Google (GOOG) for at least 5 more years.
3. Garmin looks cheaper on a PE basis alone, but that is mostly due to the fact that TomTom has to amortize their purchase of TeleAtlas.

Bottom-line: I prefer TomTom for the simple reason that they own TeleAtlas, and that gives them an economic moat that Garmin will never have.

Disclosure: none

Comments

[Pilot_151:]

And if the PND drops off, what will Tom Tom have? Nothing but a few maps that arenot very good!!!! But Garmin has the Marine and Aviation markets to help carry them along. Almost everyone one of you analyst discounted the depth of this company. You only look at the PND and never at the fact that they are number 1 in Aviation and I'd say number 2 in Marine navigation. Have you ever used a Tom Tom device? Oh yeah maybe you did when you navigated an article like this. And a 21% sell off because they delayed a product from coming to market? Somebody needs to have their head examined. Do I own the stock? Yes just under 100 shares, but my real stock is that I do own garmin in my plane and my boat. Wouldn't have any other product when navigation is critical to my life and safety.

2008 Jul 31 07:22 AM

[AnAtheist:]

You added TeleAtlas to increase TT's margins, did you also substract the loss TeleAtlas made from the sales?
TeleAtlas is almost making money but map making is very labor intensive and NavTeq is by far a better company than TA, it will be TT's downfall, good luck with your investing! ;)

2008 Jul 31 07:30 AM

[Kif (France):]

"a few maps that are not very good" ?
Indeed but:
How many PND or cell phone makers are battling for this market? Dozens.
How many map makers worldwide to fuel those ? 2
Guess who will win finally ? Nokia & Tom2, the only 2 players who where smart enough to buy Navteq & TA and who now rule the worldwide game.
Now see you in one year and we talk again.

2008 Jul 31 07:34 AM

[Shorting Sh...:]

If Tele Atlas was so important, Google would have bought them, don't you think?

2008 Jul 31 08:56 AM

[Jars:]

First of all I think the writer has never used one of the current phones as a GPS guide in his car. If he did he would know how crappy this works. Thats why there still is marketshare to gain for the nuvifone because this will be a phone that can easily compete with current PND's AND Smartphones.

Second of all in the history of TeleAtlas they have never made ANY profit. With the current worth off TOM2 they have to spend more money on TeleAtlas then Tom2 is worth itself.

Garmin is a company that has own money invested and own their own development. TOM2 has everyting board out.

Besides that Garmin has Automotive, Marine, Aviation, Outdoor and Fitness products. Everyone of these markets offer better margins than Automotive and all of these markets offer a lot of growth.

My guess is that Garmin will continue to grow and maintain a solid company and TomTom will be bought by a bigger company that want's to add GPS devices to their assortment without having create it itself (e.g. Philips?).

2008 Jul 31 10:58 AM

[gridlock:]

I think TomTom knows that the PND is fast becoming a low margin commodity and has begun to focus on revenue producing services that they own and manage themselves.

TomTom has several revenue producing services in the works in addition to TeleAtlas and they work together to lower overall costs or increase value.

HD Traffic which is just getting started in Europe will cover Europe and the US in two years and will allow further mapping enhancements as TomTom will know where new roads are based on probe feedback. HD Traffic is also a revenue producer not only from TomTom users but from sales of the traffic service to other GPS makers and websites through TomTom Mobility solutions.

TomTom Work is another service that is sold to service providers and fleets. Each Work unit also becomes a probe for HD Traffic and adds to TeleAtlas data.

TomTom's free Mapshare feature is also a bonus for TeleAtlas data and along with the other services it corrects and adds to TeleAtlas maps.

Historical traffic info is also gleamed from all of these and added to TeleAtlas data for IQ Routes.

All of this allows TomTom to have some additional revenue streams and be the first to market with innovative products that will garner higher margins.

2008 Jul 31 12:52 PM

[Real Garmin...:]

Whoever wrote this article must be getting a nice paycheck from TomTom. First of all, you must be the first one ever who rounds down Garmin's 45.8% gross margin to be a 45% margin; and then compares it to TomTom's 46% gross margin, and makes a big deal out of it. Secondly, TomTom bought Teleatlas for $4.2 Billion dollars (2.9 Billion euros). 66% or 1.9 Billion euros of TomTom's purchase price of Teleatlas is assigned to goodwill. Do you understand that TomTom overpaid? 50% of their Total Assets is now goodwill. This will be subject to impairment testing, and you will see a goodwill write-off similar to the Sprint-Nextel one. In addition to this, TomTom borrowed 1.6 Billion euros and is paying a hefty interest on this loan (more than 100 million euros per year). Also, TomTom is now amortizing intangibles from the Teleatlas purchase (additional 50 million euros of expense per year). Do you truly believe that Telatlas will produce enough profit to cover these costs? At least Garmin has no debt, and has over 1 billion dollars in cash... TomTom will face some serious liquidity problems in the next year or so, while Garmin still earns "only" around 900 million - 1 Billion dollars in Net income per year. This is why I prefer Garmin over TomTom!!!!!!!!!

2008 Jul 31 11:59 PM

[Jars:]

In addition to the comments above. While TomTom borrowed a lot of money to purchase TeleAtlas they also invested a lot in HD Traffic and MapShare (in development AND marketing). Both of them are nice extra's, BUT HD Traffic requires a subscription of about 10 euros a month. This is also something people aren't really going for since consumers tend to have less problems with paying all at once, instead of paying partially at once and paying a monthly fee extra. This system is what made VDO fall from the nr 1 spot some years ago. Will history repeat itself?

2008 Aug 01 05:47 AM

[Blah, Blah,...:]

Wow, this sounds like a TomTom exec. posing as an analyst. Let's try and twist the numbers some more. How about going back to 2005 and adding in Tele Atlas numbers? Why stop in '07? TomTom wasn't cleared to buy Tele Atlas until May '08. You can't add Tele Atlas numbers to TomTom for any year prior to second quarter '08. Pathetic!

2008 Aug 01 11:17 AM

[Shorting Sh...:]

So, Tom Tom overpaid for Tele Atlas and started a PND price war which permanently eroded the prices for consumer PNDs.
I think the writer is backing the wrong horse.

2008 Aug 01 03:08 PM

[SlipperyWing:]

What a poor analysis. You completely disregard the rest of Garmin's product line, gloss over the fact that they have no debt, forget about the increase in market share in Europe (and just starting out in China).

T2 overpays for something they don't need, have a single product line, and is otherwise leveraged to the hilt....

And you pick TomTom over Garmin?

Sure the nuvifone delay is a disappointment. All delays are. However, in this current cell phone environment, I think this delay may actually be worth it.

A Q3 nuvifone release would go right on the heals of iPhone 2, instinct, and a ton of others...

A Q209 release may actually have better timing, and iphones will be all but obsoletes, or so the electronics life cycles go.

2008 Aug 02 06:19 PM

[Cheetah:]

Having used both Tom Tom and Garmin-no comparison on ease of use---Garmin is far superior to program and use. Love my Garmin and just bought a few shares today - overdone on the donwside.

2008 Aug 06 11:58 AM

[serious:]

where do these so called writers come from. We add teleatlas to t2's info but we'll just omit marine and aviation from garmin like it isn't their. Like comparing Google to another company but don't count advertising revenue. Give me a break.

2008 Aug 06 04:42 PM

[ksag:]

Agree with several of the posts regarding how poor of an analysis this is - so let me add some fuel to the fire of this TOTAL nonsense of an article.
Numbers straight from the article:
Garmin sales of $912M
PND sales of $751M.
PND gross margin is only 23.3% or $175M
The company has a total gross margin of 45%.
YOU BOZO, THE MATH DOES'NT ADD UP!!!
$912M total sales x 45% = $410 Total GM dollars
$751M PND sales x 23.3% = $175 GM Dollars

SO,
$410M - $175M = $235M GM dollars gets generated from
$912M - $751M = $161M in other sales

So, I guess Garmin produces $161M in other sales and generates $235M in gross margin dollars from those sales???

NOW THAT'S THE COMPANY I WANT TO INVEST IN!!!!!

What a laughable analysis - ON MULTIPLE POINTS!!

2008 Aug 06 09:30 PM

[ksag:]

Sorry, forgot my advice to Bapcha.

Perhaps consider changing key analysis point to Debt Ratios instead of Gross Margins.

2008 Aug 06 09:40 PM

[Well...:]

Bapcha, how do you respond to all of these comments? It seems you have been called out in multiple aspects of your article. Let's hear it.

2008 Aug 07 05:34 PM

[Glenscott:]

Yeah, waiting with anticipation for your rebuttal, Bapcha - I was about to go out there and buy $10,000 worth of T2 stock just after reading your awe inspiring in depth analysis.

2008 Aug 29 06:27 PM