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Steven Grant
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Process management consultant for start-up companies. Focused on establishing standardized operational processes and management disciplines to support rapidly growing small companies.
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  • Garmin (GRMN) 0 comments
    Jan 9, 2011 8:27 PM | about stocks: GRMN
    Evaluated via discounted free cash flow (NYSE:FCF), Garmin appears to be worth over $40 a share; even using a -7% FCF growth rate and an 8% hurdle rate (making the assumption that FCF will be 22% of the low range revenue guidance for 2010). 0% growth rate and 8% hurdle rate jump the projected value to $54 a share. Currently trading around $30 (with $120 levels not so many years past) the opportunity to grab a bargain invites some closer analysis.   
    Garmin’s market cap is $5.8B. They hold $1.9B in cash and short term securities and pay a dividend of $1.50 per share on 193,371,000 shares (as of their September 25th, 2010  3rd Q report). Garmin bought back almost $300,000,000 of its stock in 2010, while doubling the dividend, and increasing R&D expenditures significantly. At the same time, they made a major misstep by entering and exiting the highly competitive mobile phone market and their growth strategy (beyond a commitment to innovation in their 3 growing segments) remains unclear.   
    The Outdoor/Fitness, Marine, and Aviation segments are all growing, although not as fast as the Auto/Mobile segment is shrinking. Auto/Mobile provided 60% of revenue at the end of 3rd Q 2010 and is expected to shrink further. On the other hand, their Asian market is growing rapidly.
    R&D costs increased by $38.1M through 2010; this could be substantially reduced in 2011 since cancellation of the mobile phone initiative. However, Garmin stated that product innovation would be their key strategy going forward and resources focused on the phone initiative were already reallocated to other growth segments. SG&A expenses were being reduced as revenues declined.     
    Currently trading around $30 a share, Garmin appears to trade at a significant discount to its current value and a substantial discount to its potential value. The street’s story about Garmin is that single purpose personal navigation devices will be obviated by multi-purpose mobile devices, i.e., pda’s and phones. This street sense is so strong true believers even expect PC’s to be eliminated. (Note to self: short Microsoft, Android is transmogrifying ordinary cell phones into the Swiss Army knife of computing’s future.) Whether the spider-sense on the street is right or wrong remains to be determined, but the power of this belief may create buying opportunities.
    Part of the question is whether Garmin is swimming upstream while competitors are nibbling away downstream. All of their new segments have higher margins and higher growth than their leading segment.          
    In 2009 Garmin increased earnings per share to $3.50 through expense management, share repurchases, and increasing the dividend (welcome, although this brings the payout ratio to 61.34%, which gives pause). The company is debt free with $1.9 billion in cash and securities available for acquisitions or innovation.
    In their 3rd Q 2010 earnings announcement, Garmin explained their exit from the smartphone business, “…we thoroughly analyzed the rapidly changing dynamics of the smartphone market and concluded that we cannot reach the scale necessary to effectively compete in the industry.” This was either a brilliant example of cutting your loses, or a scathing critique of a product strategy that couldn’t recognize this eventuality two years and $40 million earlier.
    Earnings per share in 3rd Q 2009 fell 34% year-over-year. Agustino Fontevecchia of Forbes noted, “Excluding one-time items the number came to a meager 70 cents, a 31% drop, and below the consensus estimate of 75 cents per share.”
    Brian D. Pacampara, his December 14, 2010 article on Motley Fool, said “In a world where GPS technology is becoming more and more common on mobile gadgets, Fools remain skeptical about how Garmin will manage to stay relevant.”
    The secret may lie hidden under the big pile of cash and zero long term debt that Garmin has on its balance sheet, plus the 3,000+ engineers in its development centers. Their wins in the sophisticated avionics industry and their successful expansion into low cost sports segments suggests that they have a bona fide capability to generate value (and large amounts of cash), now they just need a strategy and a story that will drive the next wave of sustainable growth. As long as the story is that smartphones are making Garmin look dumb, the market will undervalue their potential. Innovation per se is not a compelling story after your largest initiative crashed and burned. Sustained growth can obviate the need for a story, but right now there is neither strategy nor story, and in the face of faltering growth.   
    And so we wait. The next earnings call is February 23, 2010.
    Is Garmin a value play or a value trap? Investing ultimately becomes a guess rather than a quantitative exercise. Even Garmin doesn’t know (unless they possess some preternatural powers only used under the direst circumstances) how all this will turn out. 
    Place your bets.
    Disclosure: Long GRMN.
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