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Time to Buy Garmin?

By every conceivable measure, Garmin (Nasdaq: GRMN  ) reported a blowout third quarter yesterday -- so why did the shares collapse? More curious still, why are they reinflating this morning in the face of a downgrade from Wall Street's RBC Capital Markets? Let's review:

  • Garmin sold $781 million worth of product last quarter, down 10% year over year.
  • However, higher average selling prices (ASPs) on new products introduced in the quarter helped boost gross margins more than eight full percentage points to 52.4%, and operating profit margins held on to most of these gains -- up 570 basis points to 30.3%.
  • With the result that profits exploded upward to $1.07 per share, a 30% year-over-year jump.
  • Best of all, free cash flow comes to $813 million year to date, more than double the $402 million Garmin had generated by this time last year.

What's bad about that?
Not a thing. And in fact, if you look at the trading action, it becomes apparent that investors loved the results. What they couldn't stand was the guidance.

Post-earnings, you see, Garmin held its customary conference call with the analysts. It was here that we learned that the strong ASPs enjoyed in the third quarter won't survive long into the fourth quarter:

  • Unit shipments of personal navigation devices will increase sequentially heading into the Q4 Christmas season.
  • But "pricing and margin [will remain] in line with 2008 levels" -- erasing at least some of the gains in profitability enjoyed in Q3.
  • Revenues should be flat year over year in fitness, and down in aviation. (With small airplane sales suffering across the board, from Embraer (NYSE: ERJ  ) to General Dynamics to Textron (NYSE: TXT  ) , we didn't really need management to tell us that add-on equipment for planes might suffer.)

All of which adds up to the following: Q3 was great, but it won't repeat next quarter.

Foolish final thought
As if Garmin bulls didn't have enough to worry about with the margin troubles, Chief Operating Officer Cliff Pemble confirmed that Garmin's answer to smartphones from Motorola (NYSE: MOT  ) , Research In Motion (Nasdaq: RIMM  ) , and Apple (Nasdaq: AAPL  ) -- the nuvifone -- is enjoying "relatively slow" sales. So slow, in fact, that Garmin's cutting the device's price to $199 when sold through AT&T (NYSE: T  ) .

Such a deep cut, so soon after the phone was introduced, confirms my thinking back in September: Pricing nuvifone so far above the competing iPhone (which can cost as little as $99 with the same AT&T two-year contract) was foolish-without-the-capital-F.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. Apple and Embraer are Motley Fool Stock Advisor selections. General Dynamics is an Inside Value choice, while Garmin is a Global Gains pick. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (10)

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 November 05, 2009, at 4:51 PM, marv08 wrote:

    It might be time to sell all stocks depending heavily on consumer GPS devices. With Google's free turn-by-turn app being on all Android devices and the iPhone soon, there is just no point for most people to buy a separate device, pay for subscriptions/updates, unmount and carry a second device when parking the car in a less-than-picturesque neighborhood, etc ad lib.

    Garmin has zero experience with supporting computer products (that is what a smartphone is), their computer software is terrible and if even MS and Google have problems to copy Apple's App Store, then what do we expect Garmin to pull? The nüvifone can't compete with any of the top-selling smartphones out there and subscribing to 24*70 USD per month just for a GPS device is not attractive at all.

    They should look for ways to squeeze more money out of the industrial customers in the long run.

  • Report this Comment On November 05, 2009, at 10:43 PM, Nedirection wrote:

    Having gone up and down and part way up the hill with Garmin, I find it hard to believe a new gadget can have that much impact on the stock in the long run. There has been a competitive environment with phones for a long time, and though I have GPS on my Blackberry, posting the unit in the window in areas that are unfamiliar still holds appeal. Granted, prices may need to tumble, but as more devices enter the domain, the more it will fall off the shelves. Those who have avoided this technology in the US are going to do what Americans have long done when they don't know much about these devices. They'll buy a sound name product and expect it to work well. Guess what Garmin has going for it!

  • Report this Comment On November 09, 2009, at 1:01 PM, oghowie wrote:

    Apple recently bought their own map company so I really doubt there will be a Garmin / Apple collaboration.

    Also, imagine what will happen to Garmin when the Google Nav App comes to the iPhone. I'd short it here.

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