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Garmin's biggest problem: It's still competing in a declining industry as Personal Navigation Devices (PND) have widely been replaced by Smartphones and low-cost in-dash navigation systems.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.
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.
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