Apple's (Nasdaq: AAPL)
iPhone has become a handy tool for driving directions. And
Google's (Nasdaq: GOOG)
new Android phones actually gives away GPS directions for free. But
anything that's free is a real problem for anyone trying to charge
for a product. So we shouldn't be surprised to see
Garmin (Nasdaq: GRMN)
, a leading vendor of GPS products, announce weak sales results in
its first-quarter earnings report released before the opening.
Though we should be surprised that shares were near a 52-week high
in the face of such clear headwinds.
Shares of Garmin are down more than -7% today, but this is likely
just the beginning of a sell-down. Despite the weak quarter,
management sticks by full-year forecasts, even if Garmin needs to
work even harder in coming quarters to make up for this
first-quarter shortfall. And that could be hard to pull off. Even
if Garmin weren't facing new competitors, it's fair to wonder if
this market is rapidly maturing, as most consumers that would like
to have a GPS probably already have one. (Garmin's core automotive
market, which accounts for one-half of sales, saw sales drop -15%
from a year-ago).
In coming days, it will be increasingly hard for mutual fund
managers to keep a stake in this former technology stalwart. These
funds can't exit a position quickly, so shares may take a while to
find a floor. And that's a clear opportunity for short sellers -
even after today's drop. And you shouldn't seek to initiate a long
position once shares have found a floor. The tepid quarterly sales
results are likely to keep on coming.
Company Name (Ticker)
|Garmin (Nasdaq: GRMN)
|*Based on consenus estimates
prior to recent earnings release
How do you lose nearly $1.5 billion in market value in a single
day? When the Food and Drug Administration rejects your drug that
many had expected would receive approval.
InterMune's (Nasdaq: ITMN)
pirfenidone drug, which treats idiopathic pulmonary fibrosis, a
type of lung disease, had only recently shown promise in Phase III
clinical trials. All is not lost. InterMune was asked to start a
fresh clinical trial, which could take several years to complete.
But that's better than a complete rejection. Several analysts think
that today's sell-off is overdone, as InterMune has other promising
drugs in the pipeline, including a treatment for Hepatitis C.
Moreover, InterMune's pirfenidone is the only late-stage drug
treating this form of usually fatal lung disease, so better safety
results from the next trial could yield approval. And the drug,
which is already approved for use in Japan, may also get approval
from European regulators. Once a floor has been found, it makes
sense to take a small position here, as today's selling might be an
InterMune shows the perils of biotech volatility. Investors bracing
for FDA approval had bid up shares from $14 on March 4 to $38 by
March 10. Many hoped that FDA approval would take shares toward the
$75 mark. Investors of InterMune ignored the clear safety problems
when bidding up shares toward the $40 mark. And they are
over-estimating the depths of the company's new setback today.
Biotech investing is an emotional business.
In keeping with Tuesday's look at "good earnings/bad stock
reaction," we are seeing some companies have the misfortune to
release generally solid results on a day when the market is under
pressure. For example, auto parts supplier
continues to see a sharp improvement in demand after a dismal 2009.
TRW's profits surpassed analysts' forecasts by a wide margin . And
many expect U.S. auto sales volumes to grow further in 2011 and
2012, which should help TRW to continue powering higher. But shares
are down -6% anyway, perhaps because management notes that European
auto sales volumes could come under pressure later this year.
Nevertheless, shares trade for less than 10 times likely 2011
profits. (Consensus estimates call for profits of $2.91, but they
are likely to be upwardly revised past the $3 mark after this
morning's earnings beat).
PolyOne Corp. (
are also badly slumping today, even though the maker of plastics is
seeing a nice demand upturn among its industrial customers. A
healthy housing market is crucial for continuing positive sales
trends at PolyOne, as the company provides raw materials for
exterior siding as well as plumbing fixtures. And that market is
unlikely to be on its feet before 2011 or 2012. Shares may mark
time for awhile as few near-term catalysts exist and shares are not
compellingly cheap. But this is a name to watch when you eventually
position your portfolio for a housing rebound.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.