Sunday, May 16, 2010

Navigate With Garmin

The global leader in satellite navigation, Garmin Ltd. and its subsidiaries have designed, manufactured, marketed and sold navigation, communication and information devices and applications since 1989 – most of which are enabled by GPS technology. Garmin’s products serve automotive, mobile, wireless, outdoor recreation, marine, aviation, and OEM applications.

Garmin is a difficult company to evaluate. Analysts generally consider the company a “hold.” Investor sentiment, as recorded by Motley Fools is much more positive.

The negatives appear to be obvious. Garmin participates in a highly competitive market. Some say that Personal Navigation Devices have seen their day in the sun. The press release accompanying 1Q10, extracted below, results talks about the changing market dynamic. To be sure, 1Q10 is not encouraging. The company reports a continued decline in overall revenue though not as dramatic as 2009, continued bad news for the PND segment and mixed results geographically.

On a positive note, sales in Europe and Asia continue to expand and the marine/aviation sectors and fitness sectors show strong growth.

· Total revenue of $431 million, down 1% from $437 million in first quarter 2009

Automotive/Mobile segment revenue decreased 15% to $221 million

Outdoor/Fitness segment revenue increased 28% to $103 million

Marine segment revenue increased 9% to $41 million

Aviation segment revenue increased 12% to $66 million

· Europe and Asia revenues grew, while North America revenues declined:

North America revenue was $243 million compared to $265 million, down 8%

Europe revenue was $145 million compared to $144 million, up 1%

Asia revenue was $43 million compared to $28 million, up 54%

· Gross margin increased both sequentially and year‐over‐year to 54% for first quarter 2010 from 46% in fourth quarter 2009 and 45% in first quarter 2009

· Operating margin increased year‐over‐year to 19%, compared to 13% in first quarter 2009

· Earnings per share decreased 21% to $0.19 from $0.24 in first quarter 2009; pro forma EPS increased 52% to $0.38 from $0.25 in the same quarter in 2009 (Pro forma earnings per share excludes the impact of foreign currency transaction gain or loss)

· Generated $196 million of free cash flow in first quarter 2010

Business Highlights:

· Improved margins allowing us to post pro forma earnings growth in a period of declining revenue.

· Posted strong growth in the outdoor/fitness segment as we continued to expand the product category in this market.

· Recorded year‐over‐year growth in both aviation and marine as these markets have begun to show signs of stabilization.

· Announced the Forerunner® 110 – the newest of our fitness watches which provides essential real‐time workout data at an affordable price for runners, joggers and walkers.

· Launched the GPSMAP 6000 and 7000 series chartplotters featuring Garmin G Motion™ technology with superior map panning and zooming

· Announced our proposed redomestication to Switzerland pending shareholder approval on May 20th.

· Announced our 2010 annual cash dividend in the amount of $1.50 per share representing a one‐time increase from $0.75 per share.

· Repurchased 1.4 million shares of GRMN in the first quarter.

There is no catalyst indicating the potential for a turnaround. Garmin is competing with Google in two of its segments: PND and the new Android-based telephone. Garmin is also showing interest in using its cash to make acquisitions. It just lost a bid to FLIR, to acquire Raymarine, a small, U.K. maker of marine radar systems.

Garmin’s valuation is compelling. The balance sheet is rock solid. The current indicated dividend, $1.50, yields nearly 4.5% and represents a payout ratio of 65%. The five-year growth rate for dividends is about 24.5%.

In spite of the downturn in revenues, the company is very profitable. ROE is a robust 28%. The current PE is about 9.8X. The forward PE is about 11.7X on analyst consensus earnings of $2.88. We are projecting earnings of $3.47 over the coming twelve months which suggests a forward PE 9.66X.

We think Garmin offers much potential on the upside and not an unacceptable risk to the downside. They have many obstacles to overcome. The immediate future for Garmin is not bright and therein lies the opportunity.

Disclosure: Author is long GRMN.

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