While working on the road this week, I brought along my
two-year-old GPS device to help navigate unfamiliar roads. Trouble
is, the darn thing repeatedly gave me directions that landed me at
dead-ends or blocked-off roads. Maybe it's because the software is
out of date.
I decided to use my smartphone instead, and the step-by-step
directions on my Android phone were impeccable. I suddenly realized
I will never buy a standalone GPS device again.
's ability to constantly update their software makes the choice a
As a pure coincidence, I also just reviewed the recent data of
insider buying and selling in the past few weeks. Which company
, one of the leading providers of GPS devices. Donald Eller, who
has served as a director since 2001, sold 88,000shares in
mid-August (worth a hefty $3.6 million).
Frankly, I can't blame him. Nor can I blame other company
directors such as Gene Betts and Gary Burrell, who have also been
active sellers in 2012. They likely see the writing on the wall for
this company. And with shares now up nicely from the early-2009
lows (and not far from all-time highs), they're getting while the
getting is good.
Good numbers -- for now
A recent look at second-quarter numbers gives the impression that
Garmin's business is still reasonably healthy. Sales of $798
million andearnings per share of 98 cents were handily above
forecasts (though aided by some one-time gains). Total sales were
up 7% from a year earlier, which gives the impression of renewed
vigor after this company saw sales drop 16% in 2009, another 9% in
2010 and rise only 2.5% in 2011. The auto/mobile segment, which
accounts for more than half of sales, grew a solid 8%.
But analysts increasingly say that such a performance can't be
repeated. Analysts at D.A. Davidson say the auto/mobile unit will
likely post a small year-over-year drop in the third quarter, and a
more significant 12% drop in the fourth quarter. They see sales of
Garmin's auto/mobile GPS devices falling another 10% in 2013 to
around $1.4 billion. That's down from $1.7 billion in 2010.
"Given the size of the PND (personal navigation devicemarket )
is nearly four times the size of Garmin's next largest segment
(outdoor), we forecast the shrinkage of PND will be hard to make up
with faster growth in other areas," note Davidson's analysts.
Garmin's supporters insist that the company can still remain
relevant by building revenue in other categories such as fitness,
which comprises hiking and orienteering users. So analysts at
Goldman Sachs were surprised to find that second-quarter sales in
this segment grew just 5% from a year ago, below their 15%
forecast. "This will likely fuel a key driver of thebear thesis,
namely that growth in fitness will slow due to rising low-end
competition," they noted recently.
Yet it's the threat smartphones represent that few are talking
about. Apple and Google continue to beef up their offerings: Apple,
for example, will be including turn-by-turn navigation in its
soon-to-be-released iOS 6 operating system for its line of iPhones
and iPad mobile devices. Moreover, the number of smartphone users
continues to rise, and every new user is one that conceivably no
longer needs a standalone GPS.
Risks to Consider:
Garmin's management has set a low bar in terms of guidance for
the next few quarters, so it's unlikely the company will miss
guidance in the third or fourth quarter.
Action to Take -->
Despite the clear headwinds in place, shares still trade for almost
15 times projected 2013 profits. That's also themultiple sported by
other high-tech hardware firms, such as
Research in Motion (Nasdaq:
before their growth began to slow. Insiders are likely aware that
the current forward multiple may not stand as sales growth flattens
or turns negative, which explains why they are starting to jump
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of GOOG in one or more if its "real money" portfolios.
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