Tic-tac-toe, investors want to know: After beating analyst estimates in each of the last two quarters, can Garmin (NASDAQ:GRMN) make it three in a row on Wednesday morning? Consider the following paragraphs your text-based GPS directions to Garmin's Q2 report.

What analysts say:

  • Buy, sell, or waffle? Twenty-one analysts follow Garmin, which garners five buy ratings, 14 holds, and a pair of sells.
  • Revenues. On average, analysts estimate that sales grew 49% to $645.7 million, as Garmin products continue to fly off the shelves at Cabela's (NYSE:CAB) and Circuit City (NYSE:CC), Best Buy (NYSE:BBY) and Target (NYSE:TGT).
  • Earnings. Hard for profits to keep up at that pace. Estimates call for 33% growth to $0.73 per share.

What management says:
They say actions speak louder than words, and Garmin's actions are practically shouting: "Vertical integration!" Earlier this month, management announced plans to acquire the Spanish distributor of its products, Electronica Trepat S.A. This follows the completion of its buyout of its German distributor earlier in the month, and of its French counterpart in January.

Precise terms have not been disclosed in the press releases on any of these purchases. However, digging into the last 10-Q filing (where the number generally pops up), we see: "In the first quarter of 2007, Garmin Ltd. acquired EME Tec Sat SAS (the exclusive distributor of Garmin's consumer products in France and now renamed Garmin France SAS) [and two other companies] ... for $72.1 million less $3.2 million cash acquired."

Not a lot of cash laid out for three companies, and I expect the German and Spanish purchases were similarly small scale. Management opined in the 10-Q that: "These acquisitions are not material, either individually or in aggregate, therefore supplemental pro forma information is not presented."

What management does:
The idea behind vertical integration is supposed to be that it gives a company a firmer hand in controlling costs, allowing it to boost profitability. We're not seeing that happen yet, as gross and operating margins continue to inch down at Garmin. But if taking over control at the distributors has the (presumed) desired effect, it could make a material difference to Garmin's bottom line. Fully one-third of Garmin's revenues come from Europe, and that's been increasing over time -- making now a logical time to begin tightening up operations across the pond.

Margins

12/05

4/06

7/06

9/06

12/06

3/07

Gross

52.1%

51.4%

50.6%

50.0%

49.7%

49.3%

Operating

32.9%

32.2%

31.5%

30.6%

31.3%

30.5%

Net

30.3%

30.4%

30.2%

28.4%

29.0%

29.1%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

The Fool says:
Reviewing Garmin's progress in the summer semiannual update on all of the stocks on his side of the Motley Fool Stock Advisor portfolio, Fool co-founder David Gardner gave a few words of encouragement to Garmin fans: "At a little less than 36 times trailing 12-month free cash flow, Garmin may jump out at you as a bit pricey. But it is investing in new products and distribution deals that should further cement its lead over a growing field of would-be competitors."

If you want to get a better feel for his logic, read his full investment thesis on Garmin (and his periodic updates, as the stock has grown 148% in value since) when you claim a free, 30-day trial membership to Stock Advisor.

Fool contributor Rich Smith does not own shares of any company named above. Best Buy is another Stock Advisor selection, while Cabela's is a Motley Fool Hidden Gems pick. The Fool has a disclosure policy.