November 29, 2007
Garmin (Nasdaq: GRMN, $107.95) 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
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 +77% year-to-date -- on
top of a +69% gain in 2006.
However, after peaking at $125 in late-October, the shares were 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. 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.
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