Three months ago, GPS specialist Garmin (NASDAQ:GRMN) reported its fiscal first-quarter 2008 earnings, and Wall Street groaned. The Q2 news is due out tomorrow morning; will it prompt more groans, or grunts of grudging approval?

What analysts say:

  • Buy, sell, or waffle? Twenty analysts still map Garmin's progress, down two from last quarter. Seven still think it's a buy, but a dozen more would only hold, and one lone skeptic says to sell the stock.
  • Revenue. On average, they're looking for 29% sales growth, to $956.4 million.
  • Earnings. Yet profits are predicted to flatline at a buck even.

What management says:
If it's true that actions speak louder than words, then listen to what Garmin said last month, when it announced:

... that it has adopted a Rule 10b5-1 plan covering 5 million shares of the 10 million shares repurchase authorization that was approved by the company's board ... [allowing Garmin to] repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. ... Purchases of the remaining 5 million shares under the 10 million shares repurchase authorization may be made from time to time at the discretion of management as market and business conditions warrant.

Seems to me that Garmin told us it thought the share price on June 11 was good enough to merit acting on at least half of its half-billion-buck-buyback. And guess what? The stock's still trading only about a buck higher than that price today.

What management does:
Sure, the implosion of Garmin supplier SiRF (NASDAQ:SIRF) is cause for worry. And sure, margins are shrinking at Garmin itself. But despite the epidemic of upset tummies among analysts worried by competition from GPS rivals like TomTom, and GPS-enabled smartphones at Nokia (NYSE:NOK), Palm (NASDAQ:PALM), Apple (NASDAQ:AAPL), and Research In Motion (NASDAQ:RIMM), Garmin's margins still whet the appetite:

Margins

12/06

3/07

6/07

9/07

12/07

3/08

Gross

49.7%

49.3%

49.5%

48.9%

46%

46.1%

Operating

31.3%

30.5%

31%

30.8%

28.5%

28.1%

Net

29%

29.1%

29.2%

28.3%

26.9%

25.7%

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.

One Fool says:
Still, Fools should consider the possibility of continued margin erosion -- not necessarily just because of competition from the above-named worthies, but because Garmin has allowed a pile of unsold GPS devices to accumulate in its warehouses.

As I pointed out last quarter:

... inventories grew 139% [year over year in Q1]. Worse still, from a positive inventory divergence point of view, was the kind of inventories that have piled up. Raw materials increased about 140% year over year, but finished goods increased 160%. When a company grows raw materials rapidly, this can be interpreted (rightly or wrongly) as an indication that management is getting ready to fill an anticipated surge in demand. In contrast, when finished products are bursting warehouses to the seams, you have to wonder why they're sitting there at all, and not being rushed out the doors into the eager hands of consumers.

I don't mean to beat the proverbial dead pony, but the precise number of pennies Garmin earns tomorrow is almost beside the point. Long-term investors should be looking at two things:

  • First, are sales growing faster than inventories -- and preferably, are they growing while inventories shrink?
  • Second, once the 10-Q comes out, we need to examine closely just what kind of inventories we're talking about.

Remember: Raw materials, good. Heaps of unsold GPS devices gathering dust and obsolescence, bad.

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Fool contributor Rich Smith does not own shares of any company named above. Apple is a Rule Breakers pick. The Fool has a disclosure policy.