Garmin Getting Squeezed

Uh-oh. Garmin (Nasdaq: GRMN) is underpromising again. Fasten your seat belts, Fools. Looks like we're headed south.

Garmin spooked the market on Thursday when Reuters reported comments from an interview it conducted with CFO Kevin Rauckman. In a nutshell, here's what Rauckman had to say:

• First-quarter 2008 sales will come in 40% to 50% lower than Q4 2007 sales did (so somewhere between $615 million and $738 million).
• Garmin aims to maintain its market share in the U.S., and rapidly ramp up its European market share (where it competes with strong incumbent TomTom, and one suspects, soon with Nokia (NYSE: NOK) as well) to 25% this year.
• Garmin will also be taking on cell phone provider Nokia -- and probably rivals Motorola (NYSE: MOT), Research In Motion (Nasdaq: RIMM), and Apple (Nasdaq: AAPL) -- when it introduces its new "nuviphone" in Q3 of this year

And really, that was about it. Those were the comments that sent Garmin shares down as much as 11% today -- confirmation that a great Christmas shopping season for GPS devices (called "PNDs" in industry parlance) would give way to much lower sales once everyone had already bought their PNDs, and that Garmin intends to maintain its share of rapidly growing U.S. PND sales, sell ever more of the gadgets overseas, and start selling new, higher-priced gadgets in the form of GPS/cell phone hybrids.

Reading between the lines
OK, I'm oversimplifying a bit. While that may have been "it" for what Rauckman told Reuters, there's a backstory going on here. And it's a backstory I can summarize for you in a flash if you'll kindly click through this link to Amazon.com.

(Stream-of-consciousness sidenote: Has anyone else noticed that Amazon.com (Nasdaq: AMZN) is as useful a research resource on industry pricing and product reviews, as it is, well, an online shopping mall? Gotta wonder how they're going to monetize that.)

Back to our original story; what you saw if you clicked through was that Amazon is selling Garmin's nuvi PND for about half its usual list price today. And, in fact, as recently as last week I saw the e-tailer offering Garmin and Magellan PNDs for as much as 70% off. So here's the flipside to Garmin's growth story: The more popular these GPS widgets become, the more Garmin sells -- but the more it sells, the lower the prices drop.

On chickens, eggs, and PNDs
To me, this looks like the hi-tech version of the old "which came first" puzzler. Are lower prices driving PND sales growth, or are the economies of scale that arise from enormous PND sales enabling Garmin and its rivals to cut prices? Seems to me we have a bit of both going on. As a result, it seems inevitable that Garmin's profits will not grow as fast as its sales, because each additional unit sold is being sold at a lower profit margin than the unit preceding. Add to this Rauckman's assertion that he aims to hold the line on U.S. market share and compete for additional share abroad, and you've got a second reason for Garmin's margins to fall: Price competition.

Unscrambling the omelet
OK, I don't know about you, but this is all getting way too complicated for my simple, Foolish mind to follow. I certainly don't know what the future holds for Garmin or its rivals, and I suspect you've got your doubts as well. So let's not get bogged down in hypotheticals here, or strain our brains calculating future sales and margins that are changing dynamically even as we punch our calculator keys. Let's go back to the touchtone of investing: valuation.

As of this writing, Garmin sells for 14 times its trailing-12-month earnings. Analysts, despite getting more pessimistic about its prospects by the day, still expect Garmin to grow its earnings nearly 20% per year over the next half decade. Thus, the stock is trading at a cut-rate PEG ratio of 0.7, which is a bargain by any measure. Provided that Garmin can meet analysts' growth expectation of 20% for the next five years.

That's my story, and I'm sticking to it.