Breaking a series of five straight earnings "beats," Garmin (NASDAQ:GRMN) stumbled (or came as close to it as this stock seems able) last quarter by merely matching the Street's consensus expectations. When it reports its year-end numbers tomorrow morning, will it find its way back to the path of outperformance?

What analysts say:

  • Buy, sell, or waffle? Eighteen analysts follow Garmin, which garners five buy ratings, 11 holds, and a pair of sells.
  • Revenues. On average, analysts estimate that quarterly sales grew 64% to $522.6 million.
  • Earnings. Hard for profits to keep up at that pace. Estimates call for 30% growth to $0.57 per share.

What management says:
Garmin is one of those remarkable companies that's able to expand at a rapid pace without the use of debt to fuel its growth. In fact, when last we checked in on the company, far from carrying debt on its balance sheet, the firm boasted $461 million in cash.

Expect that cash cache to contract a bit in tomorrow's news, however, because Garmin's been on a bit of a buying spree this quarter. Over a frenzied three months, the firm has acquired:

  • Digital Cyclone, which provides "location based services" such as weather reports to consumers, for $45 million cash.
  • Dynastream Innovations, a specialist in "personal monitoring technology" such as heart rate monitors, for $36 million cash.
  • EME Tec Sat SAS, Garmin's exclusive distributor of consumer products in France, for an undisclosed sum.

On balance, Garmin expects the three acquisitions to add to its earnings in fiscal 2007.

What management does:
It's good to know that profits will be forthcoming, but this Fool wouldn't mind getting just a bit more detail on the deals. For example, how fast are the new subsidiaries growing and what kinds of margins are they raking in?

An educated guess might be that Digital Cyclone and Dynastream Innovations, as services-based businesses, will boast strong gross margins, but that's just a guess. I'd like to see it prove out, though, because over the last 18 months, Garmin's rolling gross has been slip-sliding away, hitting an even 50% in the last quarter. Operating margins, too, are trending downwards, and the only things keeping the net from following are 1) favorable currency exchange rates, and 2) interest on the firm's growing cash stash.

Margins

6/05

9/05

12/05

4/06

7/06

9/06

Gross

54.6%

53.1%

52.1%

51.4%

50.6%

50.0%

Operating

35.8%

34.4%

32.9%

32.2%

31.5%

30.6%

Net

27.1%

29.2%

30.3%

30.4%

30.2%

28.4%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

The Fool says:
Garmin's weakening profitability ratios, and its first failure to exceed estimates in a year, didn't faze Motley Fool Stock Advisor co-analyst David Gardner one bit. Reviewing Garmin's Q3 report, David saw little that worried him -- just a delay in shipping some of its new aviation products. If that's truly all there was to Garmin's "disappointing" quarter, David argues that the "stock drop was exactly the kind of opportunity buyers of Evergreen stocks should look for."

Refusing to focus on the short term, David urges investors to remember: "The market for global positioning system (GPS) devices is destined to increase -- it's spreading into the consumer market and has plenty of room to grow." As the leader in this industry, it's pretty much a given that Garmin will grow along with it -- the only question being: How much?

And speaking of growing, David's found a complementary business to Garmin's, and he's recommending investors take an interest in it, too. To learn the identity of this mystery firm, click here.

Customers:

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Can't get enough of Garmin? Indulge yourself with last month's five-part series: "Dueling Fools: Garmin".

Dell is both a Stock Advisor and Inside Value pick.

Fool contributor Rich Smith does not own shares of any company named above.