GPS Maker Is Still Lost

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Investors sent shares of gadget maker Garmin (Nasdaq: GRMN  ) soaring more than 10% last week  after the GPS specialist blew away Wall Street expectations of $0.64 with EPS of $0.96. A closer look at the report, however, reveals some concerns that the initial fanfare ignored. An EPS increase of 16% helped send shares up, but it's been declining revenues that have largely plagued Garmin. Even with improving margins, earnings can only go so much higher without top-line growth.

The fine print
Analysts seem to have missed an important footnote in the company's report: Though the gadget maker posted revenue growth of 9% for the quarter, the reporting period was actually 14 weeks, not the usual 13 as in 2010. Adjusting the quarter to a 13-week equivalent implies that sales grew by less than 1%.  This worries me.

Similarly, Garmin reported that revenue from its primary automotive/mobile segment increased by 4%, but really it declined by 3.6% in this 13-week equivalent time period. And the growth problems should continue as the company predicted revenue of $2.7 billion to $2.8 billion for 2012, equal to its $2.76 billion for 2011. The expectations for earnings are even worse, with management projecting pro forma earnings per share of $2.45 to $2.60, after an EPS of $2.73 in 2011.

The last iceman
Underlying the lack of growth is Garmin's biggest problem: It's still competing in a declining industry as Personal Navigation Devices (PND) have widely been replaced by Smartphones and low-cost in-dash navigation systems. According to the research firm Berg Insight, shipments of PNDs declined to 33 million units in 2011, and Berg expects them to drop to 23 million by 2016. Even Garmin CEO Min Kao acknowledged the decline, but said the company was able to increase market share and average selling price in the last quarter.

The company has diversified into a range of niche gadgetry with products like golf watches, dog-tracking devices, and fish-finders to make up for lost growth in the automotive segment -- which still contributed 64% of sales for the quarter. Despite the growth in markets like outdoor and sports devices, these niches unlikely to match the formerly high demand for PNDs.

Foolish takeaway
Like Research in Motion (Nasdaq: RIMM  ) and Nokia (NYSE: NOK  ) , two other tech companies that peaked around late 2007, Garmin appears to have missed the app bandwagon that has helped propel Apple (Nasdaq: AAPL  ) to become the world's most-valuable company. Garmin's entry into the Smartphone market was considered a flop, but the opportunity still remains to partner up with another company that might better apply its technology. The smartphone should continue to disrupt industries as it has already with GPS devices, cameras, and computers.

Income investors may like Garmin for its healthy 3.3% dividend yield, but I'm not convinced it will ever see real revenue growth again, something I think it needs in order to be a wise investment. Furthermore, with a P/E of 18, the stock is too expensive to be considered a value play or a turnaround, so I've decided to give the gadget maker a thumbs-down in CAPS. I think it will underperform the S&P 500.

While Garmin may not guide you to retirement riches, there's one stock I believe can take advantage of the mobile revolution, and it was actually a recent pick of our Stock Advisor team. The company's growth in its mobile segment was an astonishing 144% last year, but it's still largely flying under the radar since it's better known for other services it provides. Find out what this promising stock is in the Fool's special free report, "The Next Trillion Dollar Revolution." You can get your free copy now -- just click right here.

Fool Contributor Jeremy Bowman owns shares of Apple, but holds no positions in the other companies in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Nokia and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 01, 2012, at 4:47 PM, DrBonk7 wrote:

    Respectfully, I believe it's the Motley Fool who has lost it's way hiring talking heads to doll out advice that is virtually incoherent. Name another company in the consumer electronic market with zero debt and $2.5 billion in cash? Garmin is a diversified company that, if this author had been bothered to do a little research, has consistently performed in an exceedingly competitive market, and in dismal global market conditions. The Fool continues to post articles that are polar opposites in their opinions; this author, and Rick Munarriz posted articles 1 business day apart that are great examples. No confidence in Motley Fool.

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