Kansas City Business Journal

Friday, February 29, 2008

Earnings and stock diverge for Garmin

Analyst says recession fears guide investors

Kansas City Business Journal - by Todd Natenberg Staff Writer

Despite record sales last year -- the 17th consecutive year of business growth -- and its recent unveiling of a smart phone that could dramatically expand its reach, Garmin Ltd.'s stock price refuses to head north.

The Olathe-based manufacturer of personal navigation devices has seen its stock drop from a close of $123.80 a share on Oct. 29 to a close of $61.78 a share on Feb. 26. Even the company's announcement of 2007 results, including a 79 percent increase in sales from the previous year, was greeted by a $5 decline in stock price.

Analysts attributed the drop primarily to concerns about a souring economy. A recession is expected to lower consumer spending on high-tech products, such as Garmin's GPS devices.

Some also point to the declining price of personal navigation devices, even though Garmin has been able to offset any declines in price by selling more units.

"They've been able to get lower prices of 30 percent and get a 200 percent growth in units," said Jeff Evanson, senior research analyst with Dougherty & Co. LLC in Minneapolis, who has a favorable view of Garmin.

Evanson said it's a great time to buy Garmin stock "because concerns about consumer slowdown will abate in the next two years, and Garmin will succeed in their product transitions."

Perhaps Garmin's biggest product transition will occur later this year, when the company plans to roll out its nuvifone, which combines the attributes of its popular nuvi line of GPS units with a wireless phone and Web browser. The device, which moves Garmin closer to competing head-up with Apple Inc.'s iPhone., is to be offered in the third quarter of this year.

During an earnings call, Garmin COO Cliff Pemble described nuvifone as "the first device of its kind to integrate the most commonly used functions of connecting, communicating and navigating in an elegant mobile form factor."

GPS and personal navigation products are spreading throughout the marketplace, becoming a common accessory available in new automobiles and a feature on BlackBerrys and wireless phones.

"There is increased competition in the personal navigation device space," said J.B. Groh, vice president and senior research analyst in aerospace and transportation equipment at D.A. Davidson & Co. in Portland, Ore. "Pricing has been very aggressive. That's going to hurt margins. As penetration increases, margins are going to continue to decline."

Garmin's profit margin of 26.9 percent remains high but has declined for the past three years. Yet the company has maintained its position as a market leader.

Garmin is No. 1 in the North American market, but its share has declined. In 2007, it controlled 45 percent of the market in terms of units sold, compared with a 57 percent share in 2006, according to estimates by Dougherty & Co. Its main competitor, Netherlands-based TomTom NV, had a 21 percent market share last year, up from 15 percent the previous year.

The situation is reversed in Europe, the Middle East and Africa. Dougherty's estimates show Garmin with a 25 percent market share in these markets in 2007, up from 16 percent the year before. TomTom has a 43 percent market share, down from 51 percent in 2006.

Garmin officials declined to discuss the seeming mixed signals from investors.

"It's not really our role to comment on short-term stock price performance," CFO Kevin Rauckman wrote in an e-mail response to questions from the Kansas City Business Journal. "However, we believe we've demonstrated that Garmin had a successful 2007, and we're poised for another year of great success in 2008 and beyond."

Groh described Garmin as being a "high-flying stock for a long time."

If the company keeps doing what it is doing, the stock price will rebound.

"At some point, you will get appreciation from the market," Groh said.