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Garmin, Ltd.
Re: Pocket Street Navigator by Garmin

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By jimgillies
September 9, 2004

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Dennis,

I love this because I see it as another move in Garmin's ongoing strategic war to steal the automobile navigation market.

Further explanation - I served as an analyst for a student-run real-money portfolio at the university where I just completed my MBA. I recommended Garmin in June at a $30-32 buy price because I reasoned that the stock's beating after the disappointing first quarter was overblown.

My investment thesis hinged on the presumption that Garmin was fighting the war for automobile navigation in a manner outside of the expected route. All of my research showed that industry analysts believe automobile navigation to be 'the next big thing' for GPS, and that industry growth would come from that market (a fact concurred to by Garmin in their Q1 conference call). Most industry insiders believe that on-board, built-in, navigation systems will rule the day, and so companies with OEM contracts will, in-turn, rule the market (as we see with airplane OEMs and Garmin).

However, Garmin had no presence in automobile OEMs, and, I believe, little to no interest in cultivating those OEMs (just yet). Why? I think they well understand the trends underlying auto navigation. In my investment report, I presented it (somewhat) like this:

1) Average age of vehicles on the road is around 6-7 years. Let's assume that, for the sake of argument, this translates into a 100% vehicle turnover of 12 years (twice the average and not too outlandish, my two cars are 13 and 8 years old and run as well as they did 5 years ago; surprising, given that one of them is a Dodge)

2) Built-in navigation systems are only now becoming available. For example, Nissan offers auto navigation in their 2005 Altima, but the customer has to upgrade to the 3.5SE (rather than the standard 2.5S model). This model upgrade adds $5,300 ($CDN) to the MSRP. To get the navigation system installed, add another $3,400 ($CDN). So to get the benefits of auto-navigation, I have to shell out $8,700 extra for my new purchase. The relative rarity of auto-navigation systems led to estimates of significantly less that 1% of new vehicles being sold with built-in navigation. Even if the rate of new vehicles being provided with auto-navigation systems doubles every year, if we consider a 5-yr explicit forecast for valuation purposes, after 5 years, we end up with approximately 97.5% of vehicles on the road without a built-in auto navigation system. Clearly, this market, while it might be the 'next big thing' is not going to sneak up on us.

3) Now look at what Garmin (and similarly, Magellan) is doing. There are multiple variants of the StreetPilot available. Many feature built-in hard drives of all streets and points of interest (i.e. Denny's) in North America. But if I don't want to shell out the $1,750 $US for the StreetPilot 2660, then I can get pretty much the same benefits from an iQue 3600, and get a pretty decent PDA into the bargain (for $643 $US including automobile mount). Or I can buy a cfQue 1620 to fit into my existing PocketPC PDA for only $268 $US. Or I can buy a GPS18 for only $163 and turn my laptop into an auto-navigator. Or now I can buy a Quest for portability between vehicles and pockets. You can see where this is going.

The point here, is that Garmin is delivering the benefits of automobile navigation TODAY, in many formats for many budgets. By the time (beyond my explicit forecast period) that built-in systems become serious challengers to the out-of-the-box solutions provided by Garmin, the dominant company in the mobile space is likely to remain Garmin, who would then be better able to negotiate favorable deals on the big contracts demanded by the automakers.

One last point. During our conference call with the other analysts and the portfolio manager, I likened this delayed 'next big thing' adoption scenario to Ballard Power (makers of fuel cells to replace the internal combustion engine). That stock had hummed along in the $30 US range for a few years until 2000 when, on reports of it being the 'next big thing' it shot to $150 in relatively short order. A year later (well after the bubble had burst) it was still selling near $80 a stub. The problem was that, yes it might be great and wonderful technology, but without the infrastructure to refuel cars powered by Ballard cells (fuel cells run on hydrogen), adoption of fuel cells as automotive power sources, and hence cash streaming in to Ballard, was a lot farther off than the optimistic share price allowed. Today the stock trades at around $6.50. I argue that Garmin sees that the day of the 'next big thing' is farther off than most want to realize and, instead, are doing something about it now, so as to be in a more advantageous position when the 'next big thing' really does become deserving of its name.

Thanks for reading,

Jim


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