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Garmin

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By emiller8988
July 29, 2004

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Garmin -  this is one of the very few (count about 4 now) companies that I own and would be happy to continue owning if I had a space trip scheduled where I wouldn't be back on earth for 10 years

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value." (1996 Chairman's Letter)
Find me a tech company that has gross margins of >50% and creeping up and...
1) Has shown a willingness to share cash flow with shareholders via dividends (announced $0.50 dividend today.)
2) Has resisted the disgusting practice of shareholder dilution via options abuse

These insider owners could have been granting themselves more shares via options. Instead they choose to buyback stock and share cash flow w the shareholders. God Bless Garmin's owners and management. Those two items alone make this a stand out company. This is a long-term buy when the dust settles from today's blow out earnings.

Garmin, a leader in global positioning system equipment, is a well-run company in a high-growth industry. Recent margin pressures stem from factors that look manageable, such as natural spikes in memory and color screen prices that precede industry capacity adjustments and Garmin's incremental costs associated with a large product refresh cycle. The long-term outlook is solid given Garmin's technology, market share, and management assets.

Consumer GPS devices (80% of Garmin's sales) include automotive and handheld products, two segments that industry analysts expect to grow faster than the overall market for GPS equipment. GPS-enabled consumer devices--providing data like driving directions, points of interest, and restaurant suggestions--are growing in popularity. Advances in signal strength and coverage are expected to improve service and stimulate additional demand.

The aviation segment (20% of sales) represents another great opportunity for the company (I've got a Garmin in my little 182 and it's wonderful!!). High barriers to entry, the result of tough certification requirements, help insulate Garmin from increased competition and deliver large profit margins. Garmin already has a strong position in avionics and is set to expand the business. The company has filled out its product portfolio with a high-end GPS avionics acquisition, doubled the manufacturing capacity at its facility in Kansas, and signed up several key manufacturers for its next-generation equipment.

Garmin has a couple of key advantages over competitors. By manufacturing almost everything itself, Garmin skips the middleman expense, and the tight link between design and logistics minimizes disruption. For example, Garmin can quickly redesign around some component shortages to avoid manufacturing delays. The company can also adjust output or add new features quickly should consumer preferences suddenly change. A strong management team and solid balance sheet are also key, as Garmin works through various tech and consumer-electronics cycles.

Valuation

Garmin's revenue should keep growing at an average annual rate of at least 17% for the next five years, slightly faster than the overall market for GPS equipment. Look for operating margins to hover around 32% (but they blew them out the top this quarter), a conservative discount to historical levels where they've been >50%. This will reflect the mix shift to lower-margin automotive and consumer electronics and relatively less high margin aviation stuff. Research and development expenses will grow with sales, as Garmin must continue to invest in new products to remain competitive. Plan for a cost of equity to 11% to reflect additional uncertainty surrounding component costs and increased competition.

Risk

Consumer-electronics manufacturing requires rapid product cycles; transition costs and inventory write-downs are key risks. GPS signal availability and attributes are not controlled by Garmin; though unlikely, any changes would introduce risk.

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