Garmin: Navigating to Nowhere

I am currently short Garmin (GRMN). I believe that while the current year's earnings/revenues may be achievable, the company is headed down the wrong path in the wrong industry.

Garmin trades at about 10x consensus FY08 expectations of $3.95. Many will argue that this is simply too cheap for a company with such promising growth prospects and that remains underpenetrated.

I, on the other hand, believe that while revenue may continue to increase, margins will continue to be under heavy downward pressure. The onslaught will come from all sides: lower ASPs, more competition, the inability to reduce the bill of materials quickly enough, and the commoditization of GPS (iPhone (AAPL), Blackberry (RIMM)).

Furthermore, Garmin doesn’t own any of the valuable assets, i.e. the maps, themselves. In this scenario, Garmin simply becomes a producer of hardware. And now, they find themselves in an unenviable position: what features can we add to our GPS devices that will make them more attractive to consumers? MP3 player? Removable media cards? I, for one, would rather be a handset maker who decides to add GPS to my devices than the other way around.

The problem with something that becomes ubiquitous is that generally it becomes not very profitable unless you have a strategy to prevent others from entering (think iPods and iTunes).

To add insult to injury here, it certainly isn’t helping that the US consumer is hurting, or that it seems as if Garmin may be coming close to a saturation point. Add a few missteps relating to the nuviPhone (which really is an absurd idea), and I’m not sure if Garmin will ever find its way again.

One more thing… it frustrates me to no end when I see a management buying back shares as their business deteriorates. Essentially, they are taking shareholder money and burning it.

As for trading this stock, the short interest is high and it tends to find GARP buyers. My strategy has been to short the stock on rallies and leave enough dry powder to scale into a larger position as the valuation becomes more and more untenable. Good luck!

Disclosure: Author holds a short position in GRMN

Comments

[Sudo Nim:]

1. Who cares?
2. Haven't we seen enough of these articles saying the same thing?
3. This may have been a good, earth shattering, article in September 2007. It's yesterday's news. Thanks for regurgitating this nonsense we've seen countless other times.
4. I, on the other hand, I think, however, I, however, according to me, I think that, however, on the other hand, pizza.
5. "valuable assets, i.e. the maps" HA! Because Tele Atlas has been SOO profitable the past few years... What a bargain Tom Tom got with the TA acquisition...
6. "Garmin may be coming close to a saturation point" - This is a joke, right?
7. "I’m not sure if Garmin will ever find its way again" SO CLEVER! I see what you're doing with the pun and it is just magnificent. If I had three thumbs, they would all be up.
8. Good luck!

2008 Sep 14 03:36 AM

[Econ Minor:]

Just another hedge-fund mentality guy trying to support his short position.

2008 Sep 14 09:43 AM

[Econ Minor:]

p.s. to previous post... I think the know-nothing Fed may sooner or later step in to do something about the shorts AND those who use the blogs to firther their positions. Cramer has it exactly right on that issue. Hope you are not "nekkid" in your short positions. BooYAH !

2008 Sep 14 09:45 AM

[Econ Minor:]

Oops... SEC.

2008 Sep 14 09:46 AM

[Econ Minor:]

Ooops... further. ("Nekkid" stamds... I'm from the South.)

2008 Sep 14 09:47 AM

[WEBISKING:]

The options on this stock have signaled downword pressure since the stock was 100 on january1

2008 Sep 14 12:14 PM

[Stockgobblin:]

I love how he says that management is essentially taking shareholder money and burning it by buying back shares with their own money. Where did this guy come from. He's a nut!!

2008 Sep 14 12:49 PM

[daytrading:]

Garmin stinks, esp. lately, he's right to want to short it.

2008 Sep 14 01:40 PM

[jimmy46:]

I believe you're wrong and am buying stock at these bargain prices.

thx for helping push the price down to such a bargain level for me ! :)

2008 Sep 14 02:05 PM

[daytrading:]

If the market goes up from here it will probably go up a bit but if the market makes a new low, its goodbye charlie since it made 2 new lows in the last couple of weeks.

2008 Sep 14 03:16 PM

[User 261981:]

Garmin makes a fine product. I hope that the airline that I fly in didn't replace their GPS with a GPS ready IPOD or a JEN JEN!!! Garmin is in the gps business. Be it in air, water, car, trails, whatever.

The other GPS units are akin to the Bentley computers or TRaSh-80.

I bought my phone to make phone calls... not find fish or my house. But if that were a primary concern when buying, I would have looked for the word GARMIN inside.

I own Garmin and I will continue to buy it the cheaper it gets. If you want to sell your shares, just keep lowerring the price. There are plenty of buyers.

2008 Sep 14 03:23 PM

[Pessimistic...:]

Garmin has been on the for front for many years. The military will cede that. They will eventually find their nitch and make it happen for themselves. Unfortunately, F and GM did not get with them as I feel they were early into the game along with many phones. Be that s it may it is a metter of time. There are many cycles and garmin is one of them. They will be back in the mix. They are that good. 261981 is correct.. I also own the GPS and believe in it.

2008 Sep 14 05:16 PM

[TinyTim:]

Garmin makes an excellent consumer product. They have a brand in PND similar to iPod with MP3. My understanding is that they also make their own RF chips vs SIRF. Not sure about their presence in the defense or auto markets.

That being said, the market for PND's has followed a similar trend to almost all consumer electronics. Prices have dropped dramatically in the past two years. Second tier competition has been washed away. Saturation is nearing for all but those waiting for true commodity pricing.

Strolling thru the CES in Vegas nine months ago, GPS technology was pervasive then. This year should be more of the same, except cheaper. Sure hope Garmin has other products than PND in its portfolio, and I don't mean phones or even consumer electronics. No clue why mgmt would be buying shares otherwise.

2008 Sep 14 05:27 PM

[TinyTim:]

Another thought- Garmin has the expertise to expand the GPS market into related technologies such as differential GPS PND for higher precision / accuracy. This may allow them to hang on.

2008 Sep 14 05:39 PM

[Pilot_151:]

Glad to see so many Pro Garmin investors out there. I've fighting with the idiots from seeking Alpha for months. They always look at the Auto GPS market and make their worthless comments.

I had a Garmin in my plane before I sold the plane and will on my next one. I have Garmin on my boat. I have the Garmin software on my PDA (which by the way is another market the these idiots forget about).

Don't be too surprised to see Garmin come out with a Map division of their own. The management of this company thinks in terms of the future and quality, a concept that these idiots can't grasp.

I used to get angry about how Seeking Alpha somehow got in the news section of Yahoo, but now I have fun writing about how stupid these people really are. SO THANKS FOR DRIVING THE STOCK DOWN SO I CAN BUY MORE AND PROVIDING ME ENTERTAINMENT.

2008 Sep 14 08:26 PM

[AnAtheist:]

geez, it's nüvifone, not nuviPhone (do I smell an Apple fanboy)
sharebuyback is a positive for shareholders
What an amature, the market may reward Brian Griffin's (the dog on Family Guy?) short position but that does not make him right about anything he's written about Garmin.

2008 Sep 15 09:37 AM

[huerix:]

Have any of you actually tried to use a phone as a GPS for turn by turn directions? Even the biggest phone screen is inferior.... and then there is always the possibility of a phone call. It amazes me how Garmin continues to have multiple spots on Amazon's top selling list, updated hourly. The other company to do that is Apple- also beaten down in this raging insane market.

2008 Sep 15 12:17 PM

[carqwik:]

GRMN makes the most advanced avionics for general aviation today (except for the high end biz jets). It's amazing stuff with super high margins. While the PND market will have shrinking margins over time, like any consumer electronic device, somehow or another, new applications/technolog... are found, cost reductions/productivit... improvements, and wider adoption provide a counter balance.

The low P/E of this virtually debt free company is insane. When the momentum shorts get out of this stock, it will again be in the $60 range where it should be.

2008 Sep 18 11:54 PM

[Bomber Joe:]

I've always thought of Garmin as an aviation company. I've flown with Garmin units for years. The Garmin at the top of my Xmas list costs $39,000.00 plus installation. I'm not flying with a $200 TomTom! I've never seen a low-end auto-Garmin, but I've sure seen a lot of $39,000 aero-Garmins - and they're really fine. BTW: the aero-Garmins include Garmin VHF radio transceivers. Does that make Garmin a communications company? I honestly don't think those analysts know their backsides from a hole in the ground.

2008 Sep 19 12:38 AM

[Brian Griffin:]

Thanks for all your comments. I think many commenters would be served well by remembering that no matter how cool a product is or how useful (Garmin is both of these) -- the value of a company is derived from future cash flows. Garmin to me seems to fail miserably on this count for the reasons I've outlined - declining ASP, declining margins, increasing competition, and poor allocation of capital. Good luck to all.

2008 Oct 12 07:56 PM

[SlipperyWing:]

OK, you hooked me... defend your "poor allocation of capital" statement.

On the surface this is yet another narrowly focused write up on a company with four segments.

Perhaps you didn't read that the Garmin integrated cockpit achieved certification in the Cirrus SR22 platform recently? Did you know that Cirrus builds 4 airplanes per day?

Did you also know that with the Cirrus deal, there are no other OEM's that DON'T offer the Garmin integrated cockpit?

And what about the Forerunner series, in particular the Forerunner 405 that can't seem to stay on a shelf it's so popular.

And then there's the marine division which has been expanded quite extensively over the last 12 to 18 months, the results of which are just now starting to show up on the balance sheet.

The company makes a billion in cash nearly every quarter, has no debt, is buying back shares, is buying up European distributors to help gain market share in the EU over Tom Tom... and you question the capital allocation?

2008 Oct 12 08:34 PM

[Brian Griffin:]

A poor allocation of capital is buying hundreds of millions of dollars of stock at prices above 30 and 40 dollars while the business is slowing and margins are weakening. Put another way if they had waited to buy stock now, they could buy twice as many shares. Shareholders would be best served by a return of capital in the form of dividends instead of this waste. GRMN is not alone in this practice - many companies have bought back stock with their cash so they could pump up eps by a couple pennies instead of giving it back to their shareholders to make a better investment decision. I hope that helps you understand what's going on.

2008 Nov 10 11:32 PM