Buy, Sell or Hold: Garmin Defends Its Market Leadership

Q: What’s the outlook for Garmin Ltd. (GRMN), the GPS system maker?

• Diane Begue of Medina, Ohio

Garmin Ltd., a leading producer of global-positioning systems, has a strong market position, meaning its stock should deliver nice profits if purchased at the current low valuation.

It was just about midnight, on a chilly and rainy Dec. 10, when the diesel engine of my 42-foot sailboat, “Southern Cross,” suddenly stopped dead in the middle of the Delaware Channel, just north of the Elbow of Cross Ledge, two thirds of the way up the Delaware Bay from Cape May.

I knew I was in trouble.

The green-and-red bow lights of a big freighter less than a mile behind me indicated that I was smack in the middle of his intended course. And with my 11-year-old daughter sleeping deeply down below as my sole company on board – and powerless and adrift in one of the narrowest shipping channels with the highest freighter traffic in the world – I understood that I had to react fast.

Within a couple of minutes I had my mainsail up and was able to steer clear of the channel, as I was being hailed over the Marine VHF radio band by the freighter whose captain realized that I had trouble and was tracking my navigation lights visually and my course and distance via his radar. With the immediate danger resolved, I needed help to re-fire the motor and then navigate in the middle of a rainstorm that featured the additional challenges of poor visibility and a brisk breeze. Without any help on board, I had to resort to sail power. And I would have to get under way, and under sail, by running parallel to – but outside of – the channel, and to keep from running aground, despite my deep nine-foot draft.

Just a few years ago, this would have been thought too risky, or downright impossible, forcing me to drop anchor outside the channel, and then to radio for help. Fortunately, however, I’d brought along my state-of-the-art handheld Garmin GPSMAP 478 course-plotting global-positioning system. Made by Garmin Ltd., the Cayman Islands-based leader in portable navigation systems, the marine GPS unit enabled me to confidently steer my course outside the channel. By watching the chart displayed on the unit’s bright screen, I watched my sailboat’s progress, watching the channel details and depth readings as I did so.

I realized that I must call Sea Tow – the AAA of the sea – immediately, if I wanted to receive assistance in getting my engine restarted. My Garmin GPS unit quickly allowed me to find all the Sea Tow locations, their distance from my location, and their telephone numbers. I called the nearest one, and agreed to a rendezvous a few hours later some 23 miles up-river to resolve the engine problem and then to continue safely to my destination.

Indeed, global-positioning system technology has revolutionized navigation at sea, in the air, and on land. And with my Garmin unit, you know exactly where you are at sea or on land. By watching your progress as it’s tracked on the GPS map display, you always know your location.

Advanced features allow you to follow the fastest, direct and alternative routes around congestion, as you see fit.  And the systems take into account historical and increasingly real-time traffic information on land, and also tell you about hotels, gas stations, ATMs and other nearby points of interest.

As GPS sales exploded in recent years, Garmin saw its stock price soar by nearly 500%. But the field has become much more crowded. While Garmin took the early lead and has a market share of more than 50%, rivals are gaining.

Last year, Amsterdam-based TomTom NV (TMOAF.PK) made a splash with its own devices, which permitted the user to enter a destination address by voice – and which featured a lower selling price. This year Garmin has leapfrogged again, this time by rivaling offerings featuring more accurate and more versatile voice-recognition capabilities.

Clearly, the technological leapfrogging, like voice-recognition technology and real-time traffic data, is creating more market-share volatility, even as market saturation and increased competition are bringing prices down. To make matters worse, mobile phones – such as the Apple Inc. (AAPL) iPhone, and others made by such firms as Nokia Corp. (NOK) – are adding land-navigation capabilities. This has forced Garmin to strike back by entering the mobile phone market.  This proposition is easier said than done, since penetrating this ultra-competitive market is extremely difficult and the rivals in the mobile-phone sector are goliaths.

In this environment, predicting a technological winner is difficult. And it is easy to see that profit margins and sales growth rates by manufacturer are going to keep getting compressed by endless competition.

Already we have seen Garmin miss reduced earnings estimates in the last quarter. And Nokia’s $8.1 billion purchase of U.S. digital-mapping king Navteq Corp. (NVT) highlights the rising competition. But Garmin isn’t rolling over and will not let its lead go without a fight. It first tried to acquire a digital-mapping company of its own. When that failed – in Garmin’s typical aggressive fashion – it refused to give up and resorted to a well thought-out Plan B.

Garmin locked up a long-term deal with Navteq – despite the sale. Then it signed up for the mapping firm’s real-time traffic services. And it continues to consider other services to offer customers – hoping to improve both its margins and its overall profitability.

While the long-term situation in electronics is always one of flux and needs to be monitored closely, the reality is that Garmin’s shares have taken a dramatic beating, plunging 73% from their all-time high of $125.68. Garmin shares closed Friday at $34.46, up 82 cents, or 2.44%.

With a current Price/Earnings Ratio of 8.3, a forward P/E of 9.7 and a Price/Earnings to Grow Rate [PEG] ratio of about 0.5 – and with the Christmas shopping season looming – Garmin is now a value stock with strong growth to come.

The current “doomsday-scenario” pricing sets an absurdly low bar for an industry leader to jump over, meaning the stock represents a solid – if not downright attractive – value at these levels.

Now featuring the top voice-recognition technology and adding other important features and services, Garmin is demonstrating that a bare-fisted response to competitive changes has underscored a willingness to defend its market leadership. Buy this high-tech growth stock at a value-stock valuation.

Action to Take: Buy Garmin Ltd for its GPS-market leadership. At current levels, you’re buying a high-growth stock at low-growth, value-stock valuations. It’s too much of a bargain to ignore.

[Editor’s Note: "Buy, Sell or Hold" is a new Money Morning feature that has most recently analyzed such companies as Berkshire Hathaway Inc. (NYSE: BRK.A), Cisco Systems Inc. (CSCO),  Chevron Corp. (CVX), Valero Energy Corp. (VLO), General Electric Co. (GE), and steelmaker Nucor Corp. (NUE).]

Disclosure: Horacio Marquez holds no interest in Garmin Ltd.

Original post

Comments

[VintonCounty:]

If HM is so enthusiastic about GRMN, why does he own none?

2008 Sep 15 02:07 PM

[gzulauf:]

If he had owned some, I imagine you (VintonCounty) would have responded - 'Of course HM should pump the stock - he owns it!!!
I thought his rationale was reasonable and to the point.

2008 Sep 15 09:03 PM

[Buzsaw:]

I think the best marketing too; Garmin could have is free software updates for already sold units. It is rather "galling" to have paid $1200.00 for their best mobile land unit and then be told that an update would cost an additional $200.00 per year to stay current.
They already have the software,(developed for newer models), it would cost them very little to make it available on-line to former customers to down load to their units and would give a "warm fuzzy" feeling to former customers knowing that the company was not trying to gouge them further. After all, you can now buy a new unit with current software and many new bells and whistles for about the same price, or little more, than the new software update.
I think that when I am ready to invest in the new bells and whistles, I will look for a company who sells the unit with free annual updates for about ten years.
New units could come with the new software in July, to give new owners some advantage and Christmas gifts would have the new software. The update could be made available to former customers in January. Tell me where I am wrong.
I own a Garmin GPS and Garmin stock.

2008 Sep 16 12:23 AM

[Buzsaw:]

Oops. it should say marketing tool.

2008 Sep 16 12:27 AM

[gmapper:]

Buzzsaw, I'm afraid that you may not understand business model for land navigation devices, if the "software" that you are referring to is the street map data. Garmin does not own the street maps, but licenses them from Navteq and others. Navteq doesn't give free updates to Garmin, and actually doesn't even give a discount on the mapping data for updates. That being the case, Garmin has no choice but to pass along the update cost to its customers. The update price consists primarily of license fees along with dealer markup.

Believe me, Garmin would love to give free or cheap updates if it could, but the current competitive market won't allow them to eat the price for updates, when no one else does. I'm pretty sure it is galling to Garmin to have to pay the same for an update as for a new unit.

If you are asking how I know this, I used to work for Garmin in the land navigation area.

We parted ways on good terms a couple of years ago.

Best regards,
gmapper

2008 Sep 19 01:13 AM

[ringy:]

Either GRMN is in the cell-phone business or it will not recover the PND (Personal Navigation Device ) growth

www.twice.com/index.as...

With GPS and Google Maps on my iphone I quit searching for a GPS only device a while back.

2008 Oct 05 05:26 PM