How Garmin Stacks Up

I believe in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should, too. But even I have to admit that some growth stories are bogus -- hence this regular series.

Next up: Garmin (Nasdaq: GRMN  ) . Is the leading maker of global positioning systems (GPS) the real thing? Let's get to the numbers.

Foolish facts

Metric

Garmin

CAPS stars (out of 5)

**

Total ratings

5,089

Percent bulls

92.5%

Percent bears

7.5%

Bullish pitches

946 out of 1,044

Highest rated peers

Harman International, Nokia (NYSE: NOK  ) , Sony

Data current as of Sept. 30.

I've been bearish on Garmin for more than a year now, largely because of its competition. I've been hoping that insiders would give investors a show of faith by buying shares of their company on the open market. Instead, we've seen the opposite.

There hasn't been a lot a lot of selling, but there's certainly been some. Garmin vice president of marketing Gary Kelley was the last to sell on the open market, in March, according to Form 4 Oracle.

Fools don't appear to care. They're more concerned about GPS systems being built into iPhones and Android handsets. In July, Foolish investor eshopper wrote:

The consumer GPS party is over. Smartphones take it and the rest is commodity business with low margin personal GPS devices. Professional GPS potential (ships, aircraft, etc.) is limited.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

11.9%

(6.7%)

(11.3%)

Revenue growth

(0.8%)

(15.7%)

9.9%

Gross margin

50.6%

49%

44.5%

Receivables growth

(3.9%)

17.9%

(22.2%)

Shares outstanding

197.6 million

200.3 million

200.4 million

Source: Capital IQ, a division of Standard & Poor's.

I'm inclined to side with eshopper, but there's still good news in this table. Let's review:

  • Net income growth has returned after a two-year downtrend.
  • A lack of revenue growth suggests that the company's expanding earnings through careful expense management. Better gross margins also speak to this possibility.
  • Garmin has used cash to repurchase shares. Smart move. Management has a history of producing high returns on capital, and Garmin produces close to $900 million in free cash flow annually.
  • Finally, receivables are trending in the right direction, which should continue to aid cash flow.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 yrs.)

Apple (Nasdaq: AAPL  )

55%

Garmin

0.2%

Google (Nasdaq: GOOG  )

25%

Nokia

(26.1%)

Research In Motion (Nasdaq: RIMM  )

52.5%

TeleNav (Nasdaq: TNAV  )

Not applicable

Source: Capital IQ. Data current as of Sept. 30.

Here's where competitive concerns manifest visually. Smartphone makers Apple, Google, and RIM have all enjoyed outsized growth as Garmin has stalled. Nokia has fared worse, but the Finnish phone giant is also rich with capital resources. The Navteq business it snatched away from Garmin also makes for a nice add-on.

Grade: Unsustainable
But add-ons don't usually lead to hypergrowth, and that's not the case here, either. Garmin's cash flow makes it far too cheap to short, but its competitive weaknesses leave me unwilling to buy.

Now it's your turn to weigh in. Do you like Garmin at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Garmin:

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Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. Google and Nokia are Motley Fool Inside Value picks. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Apple and Google and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


Read/Post Comments (2) | Recommend This Article (2)

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 September 30, 2010, at 11:18 PM, corrysj wrote:

    Those NNIG numbers are pretty sobering. And Cramer did have it in the 'Sell' block earlier this year when he said it could go to $24. However the growth and margin figures are pretty reassuring. I really like their products and our Nuvi is mandatory on road trips. And Garmin is still the #1 GPS for mariners and aviators. The Android is slick, but it doesn't transition seamlessly from GPS to phone. I bought @ $36 and will wait for holiday earnings before I decide to sell.

  • Report this Comment On October 02, 2010, at 7:01 PM, pstoimenov wrote:

    The margins will go down, obviously because of the smarthpones competition. However anybody thinking that a smartphone is better than GPS for navigation has not seen it in action.

    1. Price- the price you pay for data plan every month to have a GPS on your smart phone. I understand there are well to do people that can afford that but for the average American family that makes 40k before taxes owning even one smart phone with data plan is outlandish. As the financial condition of the average citizen is discussed a lot here you know in what dire financial condition he is. For the GPS you buy once at a reasonable price and then you drive.

    2. Screen size. The GPS has a reasonable screen size. Anything bigger than iPhone (3.8 in) is way too big and heavy to be comfortable phone for most of us. Go to a store and pick the Droid X, you will see my point.

    3. Software. The Garmin software for navigation is quite adapt for quick changes when necessary. And this is when you need it- miss a turn or road repair change of road. The iphone I had seen in action recommended U-turn and 32 miles backtracking. You see this once and you will never use a smartphone for this again.

    For all above reasons I beleive that the GPS business is here to stay for the foreseeable future. The smaller players will suffer, Garmin will keep going.

    Disclosure: I own shares of Garmin.

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