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Profit from a +200% Increase in the Market for GPS
Devices with Garmin (GRMN) |
Published: November 26,
2007
Garmin (Nasdaq: GRMN,
$96.91) is one of the world's leading
suppliers of global positioning system (GPS) devices.
Years ago, anyone who peeked into the flight deck of an aircraft
typically found sophisticated GPS tracking and other
indispensable navigation equipment on board. Today, the same
technology that keeps pilots on track can be found almost
anywhere: automobiles, sailboats, recreational vehicles -- even
cell phones.
GPS technology, which relies on satellites to relay precise
positioning data, has evolved considerably in recent years --
and has also become much more affordable to everyday consumers.
Those who use GPS devices can pinpoint their exact location
anywhere in the world, often to within a few inches.
While this technology might seem to be a novelty, the real world
applications are almost endless -- just ask a lost hunter
wandering aimlessly in the remote wilderness or a sailor trying
to find the closest port in a storm.
According to Morningstar, the market for personal navigation
devices (PNDs) is expected to triple over the next five years.
And as the market leader, much of this business will accrue to
Garmin. The firm controls roughly 50% of the PND market in the
U.S. and has a growing presence in Europe as well, with a
worldwide network of 3,000 dealers in more than 100 countries.
Garmin's products are broadly grouped into four different
categories: outdoor/fitness, marine, auto, and aviation. By far
the most important of those is the auto sector, which accounts
for about 70% of the company's revenues and over 60% of its
operating income.
For those who haven't driven a vehicle equipped with a
navigation system, these high-tech devices have made fold-up
maps a thing of the past. Garmin's systems can provide precise
turn-by-turn directions to almost any destination, and users can
follow their progress on a moving map -- but that's just the
beginning. With millions of pre-loaded points of interest, these
systems can also provide routes to the nearest ATM machine, the
closest gas station, or a nearby Italian restaurant -- and can
even steer you around traffic tie-ups.
In-dash navigation systems are catching on quickly with many
drivers and automakers. And as you might expect, this has led to
impressive sales growth. In fact, revenues in Garmin's auto
segment totaled $1.3 billion through the first nine months of
the year -- a dramatic +109% increase over 2006. Meanwhile,
those in the firm's other divisions are up briskly as well,
pushing overall sales for the year up +69% to $2.0 billion.
Over the past three months alone, Garmin has shipped 2.7 million
units and generated $117 million in free cash flow, pushing the
firm's cash balance past the $1.0 billion mark.
Looking ahead, new markets in Asia could be key growth drivers;
sales in this region spiked more than +100% last quarter.
Software for wireless devices, like Palm's Treo, and other smart
phones could be another bright spot, as many vendors are
reporting surging demand for GPS-equipped mobile phones.
For the full-year, Garmin is expecting to ship more than 10
million units, and management is forecasting revenue growth of
+90% in its key auto segment. Of course, the firm's sizzling
growth has not gone unnoticed, and investors have bid up the
shares +66% year-to-date -- on top of a +69% gain in 2006.
However, after peaking at $125 in late-October, the shares have
been tripped up by recent market weakness, at one point retreating all the
way back to $84
-- more in line with my fair value estimate of $76 per share.
Like any company, Garmin does have risks -- such as the threat
that increased competition could erode profit margins. There is
also some concern that the firm might overpay in its bid to
acquire map content provider Tele Atlas.
Nevertheless, this is a powerful player in a rapidly growing
industry, and I would be happy to buy the shares if they dip
back below my fair value estimate. For now, I plan to keep an
eye on the company's progress during this pivotal holiday
shopping season.Good investing!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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