Attention Shoppers: Garmin Now 21% Off

Garmin (NasdaqGS: GRMN), whose shares closed at a 52-week low of $35.19, is now on the verge of being one of the top value plays on the market today. Investors hammered Garmin in response to lowered guidance and a delay of its new smartphone, dubbed “nuvifone.” Was this response an over-reaction?

Yes it was. Keep in mind that the price of a stock always (and I do mean always) both rises and falls faster than the intrinsic value of the company. I don’t really care much for the rises (because I’m not a trader), but the falls - if unnecessarily harsh - present an extraordinary opportunity for long-term value investors to get in with new money, either initiating a position or averaging down.

I employ the same strategy for my Marketocracy.com portfolio (outperforming by 35% annually, ticker FVF), my Small Cap Momentum model portfolio (outperforming by roughly 60% annually), and my Investment Advisor Newsletter (outperforming by 5% annually); and each has outperformed the S&P 500 by quite a bit.

So why Garmin, and why now?

To begin with, Garmin is quite undervalued if you step back and take a look at the whole world’s appetite for GPS equipment. With a forward price-to-earnings, using their 2008 guidance, of just above 8, investors seem to think that Garmin will no longer grow their earnings. I understand their arguments that margins are being pressured by competitors, and that the stalling of the American economy will hurt sales. I both understand and agree with those statements.

But saying Garmin won’t grow earnings in the next 2 years (which is the timeframe I like to look at stocks for) is just insane. Is the market that short-sighted? Apparently, the answer is yes. Sure, they’re taking a gamble on their new smart phones, but what about their tried and true business of selling the very best GPS systems for a growing market of GPS users? Nearly all car manufacturers are now building their cars with room for an in-dash GPS. Out of everyone I know, less than half have a GPS in their car.

Yes, but what about competition?

Competition is certainly part of the equation. There is no doubt that competition is heating up, including pure-play GPS competition like TomTom and non pure-play GPS competition like Apple’s (Nasdaq: AAPL) iPhone. I’m not entirely sure about TomTom’s numbers, but I do know that everyone I know who owns a GPS, owns a Garmin. Not surprisingly, Garmin has overtaken TomTom in global sales, after two years of solid market domination by TomTom.

As for Apple, and other non-pure play GPS manufacturers, they are newcomers. Garmin has been doing this for almost 20 years and knows their market extremely well. Apple’s iPhone GPS is great if you’re walking around, but in a car it’s clumsy and doesn’t offer nearly as many extras as stand-alone GPS systems do. Besides, Garmin is synonymous with GPS. When I ask people if they have a GPS, I don’t say GPS, I say Garmin. It’s subconscious, and it’s possible that I’m just strange, but I’ve heard others do the same. That’s pretty solid brand recognition. And I tell everyone to buy a Garmin, not because I have any incentive to (I don’t own any stock in them), but because they create a fantastic suite of products.

Additionally, I seriously doubt that Apple - or any other non-pure GPS company, will develop an in-dashboard unit for sale with new cars. It might happen eventually, sure, but I think it would be a flop for the first few years, simply because Garmin and TomTom are so deeply entrenched.

Last, but certainly not least, is the fact that Garmin has great operating cash flow, heavy insider ownership (40%), $600 million in cash (a share buyback or dividend is coming, perhaps?) and solid margins. There’s also heavy short-interest in this company which could lead to an impressive short squeeze, as shorts take their newfound gains of today.

Disclosure: Author does not own stock in any of the companies named - but may soon purchase some.

Comments

[AnAtheist:]

"$600 million in cash (a share buyback or dividend is coming, perhaps?)"
There already is a $0.75 dividend per share.
And they already bought back 5.2 mln shares during the last period, they still have an approval to buyback an additional 5mln shares.

2008 Jul 31 07:40 AM

[Ryan:]

yeah, buying back more and increasing the div

2008 Jul 31 07:59 AM

[Ryan:]

is what i meant*

2008 Jul 31 08:06 AM

[tj2996:]

I live in Europe, and TomTom (not Garmin) is the household word for a GPS. And I know quite a few folks who have bought a Garmin only to evenually replace it with a TomTom. I think Garmin's competition is stiffer than you mention.

2008 Jul 31 08:08 AM

[Ryan:]

That's good to know, TJ. Thanks for sharing. I can only speak about the American market. There's no doubt I knew TomTom was significant competition, but perhaps larger than I thought!

2008 Jul 31 08:33 AM

[Shorting Sh...:]

I have used both Garmin and Tom Tom; the only reason I bought the Tom Tom is because it was cheaper as a result of the price war which Tom Tom started last fall.
The Tom Tom sucks compared to the Garmin.

2008 Jul 31 09:08 AM

[AnAtheist:]

I live in Europe too and a year ago I would agree with you TJ it was either TomTom or Garmin with much more TomTom than Garmin.
But lately in the cars around me in traffic I see either a "different" brand GPS or a Garmin, TomTom really seems to be selling less (in my region anyway).
Garmin did buy the distributors in my region last year so perhaps there's a correlation.

2008 Jul 31 10:31 AM

[user 2lakes:]

Yawn ! Sounds just like the drivel a few years back about satellite radio and we know how that is a dying fad. GPS is just another gadget for people who slept thru school and missed how to navigate around their world. They're unneccessary unless you're on a large body of water or out in the wide open spaces.

Disclosure: Yes I own one, got it for Christmas one year from my daughter. Kept it because I didn't want to hurt her feelings. Used it 3 times. Duh, what a waste of money!

2008 Jul 31 12:48 PM

[Shorting Sh...:]

With my GPS, I can go to any city and not worry about losing my way to my hotel, the airport, or anywhere else I need to go. The days of getting lost and consulting maps are over!
In a couple of years, every car will have one factory installed.....Just like with the radio.

2008 Jul 31 12:52 PM

[Ryan:]

user 2lakes:

I agree satellite radio is a fad. theres a huge difference between satellite radio and GPS though... satellite radio has a subscription fee, GPS is one time. It will be in all cars. mark my words.

2008 Jul 31 01:45 PM

[user 2lakes:]

Ryan

Yes, GPS probably will be in every car, just like they said sirius would be, that is how the car companies make profit.

But, the average driver probably will not use it enough to make it pay. Most people go to the same places over and over. The average person seldom travels further than 25 miles from home except when traveling. I make my living driving so maybe my mind is sharper when it comes to finding my way around my corner of the world.

As far as a GPS in every car, think what the car companies will negotiate for pricing from the GPS manufacturers. When auto/truck/boat makers are installing GPS units in all cars/trucks/boats then the high margins GRMN has been making from individuals will disappear. Who going to need to buy their own GPS? Opps! there goes the big profit. That is probably the reason GRMN is trying to get into the phone business. They may see the fly of lower margins on the wall.

Just my opinion but GRMN is a long term short in my book.

2008 Jul 31 04:37 PM

[The telesco...:]

User 2 Lakes

Your analysis lacks one consideration, and actually so does the analysis of most shorts. I don’t understand why, because this glaringly obvious fact has missed most well trained analysts on Wall Street.

The rules governing the economics of a business drastically change when the government creates the market place. It’s akin to putting up a toll bridge.

Unlike most markets that Garmin seems to be compared to, like satellite radio or palm pilots, etc., GPS is a market that was artificially created when the US government launched and agreed to indefinitely maintain GPS satellites in orbit for the military. Just like the internet, highway system and space program created a whole new host of products and markets, so will the GPS system. This is an economic fact. It has to happen!

Although no one has a crystal ball and can predict how thing will turn out, your best bet is to invest in the company that has the leanest operation, best financial position/ balance sheet, that is the most innovative, and has the most flexibility.

What I like about these prices is that if Garmin comes in fourth place, behind RIM, Nokia, Apple and TomTom, it’s a still a huge win. Right now, they are number one in the GPS business. They also have a huge lead in technology over their competitors, which means the innovation gap will be hard to close. (For example, sure you can use an I-Phone to all sorts of neat stuff, but you cannot use an I-Phone to land a 747 or steer an oil tanker, but you can use a Garmin. Steve Jobs is not that innovative. )

This means difficult barriers of entry, albeit yes their margins may squeeze. The verdict is still out on this though. They also have a huge market presence and brand recognition for quality. That is important whey you buy a GPS with the idea it needs to last a few years.

Also in a rapidly changing market, who is better positioned to win? They are priced for fifth or sixth place now. Yes for the long term, it’s a no brainer company to look at investing in.

2008 Aug 07 01:30 AM