November 5, 2009
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.
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