I believe in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should, too. But even I have to admit that some growth stories are bogus -- hence this regular series.

Next up: Garmin (Nasdaq: GRMN). Is the leading maker of global positioning systems (GPS) the real thing? Let's get to the numbers.

Foolish facts

Metric

Garmin

CAPS stars (out of 5)

**

Total ratings

5,089

Percent bulls

92.5%

Percent bears

7.5%

Bullish pitches

946 out of 1,044

Highest rated peers

Harman International, Nokia (NYSE: NOK), Sony

Data current as of Sept. 30.

I've been bearish on Garmin for more than a year now, largely because of its competition. I've been hoping that insiders would give investors a show of faith by buying shares of their company on the open market. Instead, we've seen the opposite.

There hasn't been a lot a lot of selling, but there's certainly been some. Garmin vice president of marketing Gary Kelley was the last to sell on the open market, in March, according to Form 4 Oracle.

Fools don't appear to care. They're more concerned about GPS systems being built into iPhones and Android handsets. In July, Foolish investor eshopper wrote:

The consumer GPS party is over. Smartphones take it and the rest is commodity business with low margin personal GPS devices. Professional GPS potential (ships, aircraft, etc.) is limited.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

11.9%

(6.7%)

(11.3%)

Revenue growth

(0.8%)

(15.7%)

9.9%

Gross margin

50.6%

49%

44.5%

Receivables growth

(3.9%)

17.9%

(22.2%)

Shares outstanding

197.6 million

200.3 million

200.4 million

Source: Capital IQ, a division of Standard & Poor's.

I'm inclined to side with eshopper, but there's still good news in this table. Let's review:

  • Net income growth has returned after a two-year downtrend.
  • A lack of revenue growth suggests that the company's expanding earnings through careful expense management. Better gross margins also speak to this possibility.
  • Garmin has used cash to repurchase shares. Smart move. Management has a history of producing high returns on capital, and Garmin produces close to $900 million in free cash flow annually.
  • Finally, receivables are trending in the right direction, which should continue to aid cash flow.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 yrs.)

Apple (Nasdaq: AAPL)

55%

Garmin

0.2%

Google (Nasdaq: GOOG)

25%

Nokia

(26.1%)

Research In Motion (Nasdaq: RIMM)

52.5%

TeleNav (Nasdaq: TNAV)

Not applicable

Source: Capital IQ. Data current as of Sept. 30.

Here's where competitive concerns manifest visually. Smartphone makers Apple, Google, and RIM have all enjoyed outsized growth as Garmin has stalled. Nokia has fared worse, but the Finnish phone giant is also rich with capital resources. The Navteq business it snatched away from Garmin also makes for a nice add-on.

Grade: Unsustainable
But add-ons don't usually lead to hypergrowth, and that's not the case here, either. Garmin's cash flow makes it far too cheap to short, but its competitive weaknesses leave me unwilling to buy.

Now it's your turn to weigh in. Do you like Garmin at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Garmin:

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Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Apple and Google and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.