Garmin is an OEM of GPS-based and other electronic devices. Third-quarter earnings exceeded the Zacks Consensus Estimate as new product growth particularly in target areas offset the secular decline in PNDs. Though PND cannibalization by smartphones remains a matter of concern, Garmin has the financial muscle to tide over the difficult times. Moreover, it continues to secure wins at auto-makers for in-dash solutions. Garmin's market share, brand equity, compelling new products across segments, strategic alliances and financial position are other positives. So continuing decline in PNDs and a fair valuation leads us to a Neutral recommendation on Garmin shares.
Olathe, Kansas-based, Garmin, Ltd. (GRMN) is an original equipment manufacturer (OEM) of navigation and communication equipment that incorporate the global positioning system (GPS)-based technology. End product markets include marine, recreation, automotive and aviation. The company's diverse portfolio of handheld, portable and fixed-mount GPS-enabled devices provides geographical location and navigation data using the GPS satellite system.
The GPS system consists of a constellation of 24 orbiting satellites and ground monitoring stations that are controlled and maintained by the United States Department of Defense (DoD). A GPS receiver can calculate accurately any worldwide position within 10 meters or less. The accuracy may be enhanced via a supplemental system developed by the Federal Aviation Administration (FAA), designated the Wide Area Augmentation System (WAAS), which incorporates additional satellites and ground reference stations. WAAS can increase the overall positional accuracy to within three meters throughout the U.S. and portions of Canada and Mexico, for properly equipped gear. Each satellite transmits low-power encoded radio frequency (RF) signals at two different frequencies one for military use and the other for civilian use. A GPS receiver must be in the line-of-sight of at least three different satellites to get a two-dimensional location (latitude and longitude) reading, or four satellites for three-dimensional positioning (which includes altitude data). Each of the satellites' relative positions from the receiver and the respective triangulation algorithms are used to determine the precise location of the receiver. Specifically, atomic clocks onboard the satellites supply key time-tag information required for calculating the time taken by the transmitted signal to reach the GPS receiver. The relative distance between the satellite and receiver can be computed, given this timing information and the known transmission velocity of the electromagnetic energy. Like wireless handsets, RF signals can penetrate (with some signal attenuation) clouds, glass and plastic, but not solid objects like buildings or hills.
In 2013, Garmin had five reportable segments auto/mobile, outdoor, fitness, aviation and marine, which generated 49%, 16%, 14%, 13% and 8% of its revenue, respectively. The aviation and fitness segments saw double-digit growth in 2013, with outdoor and marine segments also increasing. However, the auto/mobile segment declined.
The Automotive segment includes automotive, motorcycling, trucking and traffic services. The company's offerings include the nuvi, Quest, StreetPilot, zumo (specifically for motorcycles) and GPS map families. Mobile products include the iQue and nuvi series as well as basic handhelds such as the eTrex, Foretrex, Geko and GPS series mapping handhelds such as the eTrex (Legend, Venture and Vista families), the GPSMAP series, the two-way radio series (Rino), laptops and the newly launched nuvifone. The company is a vendor to the MOPAR division of Chrysler, Dodge and Jeep, in which custom-designed in-dash GPS navigation systems are currently installed on several auto models. The new Roadtech Quest system is available on two Harley Davidson motorcycle models.
Outdoor/Fitness products include the Forerunner series for running and the EDGE series for cycling, Dakota (handhelds), Oregon (touchscreen), Rino (2-way family radio service), GPSMAP, Approach (for golfers), Astro (dog tracker) and the GTU-10 GPS tracker (web-based tracking system). Garmin continues to expand this portfolio by entering other niche markets.
The Aviation segment includes several categories of products targeted at flight decks, safety, sport aviation, portable GPS systems and related services. The product line-up includes hand-held portable and panel-mounted avionics equipment for use in general aviation aircraft, GPS-enabled navigation, very high frequency (VHF) communications transmitter/receivers, VHF navigation receivers, instrument landing system (ILS) receivers, digital transponders, marker beacon receivers and audio panels. It also includes a number of cockpit solutions.
Marine products include chartplotters, sounders and fishfinders (the GPSMAP, GPSMAP Sounder and Fishfinder series). The company has been expanding the Chartplotter line to include inland and offshore marine cartography. Aviation products also include portables (GPSMAP series), transponders (GTX series), audio panels (GMA series), panel mounts (GPS, GNC and GNS series), multifunction displays (MX series, including radars), autopilot and communications devices. Marine customers include Allison Boats, Cigarette Racing Team, Cobalt Boats, Pro Sports Boats and Ranger Boats.
Garmin products are distributed through a hybrid sales channel system that utilizes a network of 4,000 distributors and retailers in over 100 countries. They are also sold directly to OEMs that integrate the GPS capability into their end product. However, no single customer generated over 10% of its revenue in 2013. The top ten customers have been accounting for 24-29% of total sales since 2011. In 2013, 54% of total revenue was generated in North America, 36% in Europe and 10% in Asia.
The firm manufactures its products in Sijhih, Jhongli and LinKou (in Taiwan), Olathe (in Kansas) and Salem (in Oregon). Additionally, some products, such as the nuvifone, some marine products (VHF radios and AIS receivers) and all accessories are manufactured by various third parties. Management has expanded operations in Taiwan, since Asia continues to grow into a more important market. Taiwanese tax holidays are an added bonus.
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