Foolish Forecast: Triangulating Garmin

Turn on your GPS units, investors. Tomorrow, global positioning specialist and Motley Fool Stock Advisor pick Garmin (Nasdaq: GRMN  ) reports Q4 and full-year 2005 earnings. Let's see whether we can get a read on them before the fact.

Wall Street Wisdom:

• General consensus. Nine analysts track Garmin. Four of them rate the stock a buy, four more a hold, and one a sell.
• Revenues. Analysts believe that Garmin grew its fourth-quarter revenues by 39% in comparison to last year, and that it will report $305.5 million in sales tomorrow.
• Earnings. Profits, in contrast, are predicted to rise just 10%, to $0.69 per share.

Margin watch:
Garmin's rolling margins don't seem to be revealing much of a trend in its business. One quarter they're up, the next they're down. If analysts are correct in their estimates of tomorrow's news, Q4 will turn out to be a down quarter, as weak profits combine with strong sales to score a relatively low net margin.

Margins %	6/04	9/04	12/04	3/05	6/05	9/05
Gross	53.7	54.2	53.9	54.5	54.6	53.1
Op.	34.9	35.6	35.5	36	35.8	34.4
Net	27.7	29.9	27	27.4	27.1	29.2

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
Perhaps more important than the company's income statement, however, is what's going on over on the balance sheet. In the past two quarters, sales grew 39% and 30%, but inventories leapt 78% and 44%, respectively. Meanwhile, accounts receivable grew 56% and 77%. In each quarter, therefore, both inventories and accounts receivable raced far ahead of sales growth.

The story gets worse as we dig deeper into what kinds of inventories are building up. Last quarter, Garmin bought hardly any more raw materials than it did a year ago (suggesting that the company is not rushing to build new units to meet anticipated demand). However, stores of unsold, finished units nearly doubled.

	9/04	9/05	Difference
Raw materials	52,836	54,116	+2%
Work-in-process	26,433	32,166	+22%
Finished goods	52,110	98,753	+90%

This trend is much clearer than the one in margins, and it doesn't look good. If we don't see a reversal tomorrow -- inventories and A/R falling year over year -- be afraid. And if they once again rise faster than sales, be very afraid.

Garmin's competitors include Lowrance Electronics (Nasdaq: LEIX  ) (soon to be acquired by Simrad Yachting) and Thales.

Fool contributor Rich Smith does not own shares of any company named above.