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By William Patalon III
The seesaw ride continues for shareholders of navigation-device heavyweight Garmin Ltd., (GRMN).
The George Town, Cayman Islands-based company yesterday (Wednesday) announced that soaring sales sent its third-quarter profits rocketing 57% – easily eclipsing Wall Street forecasts. But the company's shares plunged $13.08 each – or nearly 11% – in regular trading after Garmin said it was taking on nemesis TomTom NV in a bidding battle for digital mapmaker Tele Atlas NV (TLATF), and announced it had launched a $3.31 billion hostile bid to do so.
Tele Atlas said today (Thursday) that its board of directors had reviewed the Garmin bid, found it superior to the earlier offer, and gave lead suitor TomTom five days to match Garmin's bid.
"If TomTom chooses not to match that superior proposal within the five business day period, Tele Atlas intends to terminate the TomTom agreement," which has been in place since July, Tele Atlas said.
But Tele Atlas also stressed that it needs a binding agreement from Garmin, before its board of directors can recommend acceptance of Garmin's offer.
Garmin's Stellar Quarterly Results
For the three months ending Sept. 29, Garmin said it earned $193.5 million, or 88 cents per share, compared with $123 million, or 56 cents per share, a year ago. After factoring out the effects of exchange rates, earnings per share were 89 cents, a jump of 78% from earnings per share of 50 cents for the comparable quarter last year. The results handily exceeded the consensus estimate of 82 cents per share, according to an analyst survey conducted by Thomson Financial.
Quarterly revenue jumped to $728.7 million, up 79% from the revenue of $408 million for the same three months last year – again easily eclipsing the Wall Street forecast of $683.2 million.
Garmin Chairman and Chief Executive Min Kao told analysts that he expected increased marketing and a strong lineup of new devices to help fuel growth through the remainder of the year, although he said profit margins would likely suffer.
"We expect pricing and market compression to intensify during this holiday season," Kao said.
Sales of navigation devices used in cars and trucks more than doubled, reaching $519 million, while sales in Garmin's aviation segment rose 27% to reach $74 million. Sales in the outdoor and fitness segment totaled $88 million, rising 24%, while revenue in the marine segment cruised ahead by 17%, reaching $48 million.
Sales in North America soared 71%, reaching $454 million, while revenue in Europe advanced a sizzling 89%, reaching $227 million. Asia, a promising-but-still-new market, contributed sales of $48 million, more than double the comparable quarter last year.
Garmin said its accelerating performance in Europe was helped by the fact that it recently bought its distributors in France and Germany, which has helped it grab market share in both markets. Now it's hoping to replicate that business model – and generate similar successes – in Denmark, Italy and Spain, and is now buying out distributors in all three nations.
The company boosted its earnings guidance for the year, telling investors it was looking for revenue of more than $2.9 billion and profits in excess of $3.40 a share. It was only last quarter that Garmin was predicting revenue of more than $2.8 billion and profits of more than $3.15 per share.
Currently, the consensus Wall Street estimate for this year is for Garmin to earn $3.42 a share on revenue of $2.9 billion.
Garmin makes several types of highly rated navigation devices, including portable Global Positioning System (GPS) units. Several received No. 1 ratings from such publications as Consumer Reports.
Some of those GPS devices retail for as little as $100, and are used by hikers, travelers and hobbyists. The low-cost nature of the devices has even touched off a new global game called "geocaching," which is a combined treasure hunt, auto rally and high-tech exploration opportunity.
Garmin is the market leader in all those categories, and in the production of automobile GPS systems, which has made it a Wall Street darling. That's one reason the stock more than doubled in recent months, reaching a high of $125.68 in late October. Garmin's shares ended the regular trading day yesterday (Wednesday) at $107.40, down $13.08, or 10.86%.
They rebounded a bit in after-hours trading yesterday, climbing $1.08 each, or 1.01%, to reach $108.48. Shares have traded between $44.53 and $125.68 in the past year.
Citing Garmin's strong financial performance, JMP Securities (JMP) Senior Analyst Ingrid Ebeling today (Thursday) reiterated the firm's "market outperform" rating on Garmin's shares and raised her target price from $100 to $140 per share.
The Nokia Juggernaut
Yesterday's share-price plunge isn't the first that Garmin shareholders have had to, well, navigate in recent months.
On Oct. 1, cell-phone giant Nokia Corp. (NOK) stunned the market – and Garmin investors – by announcing plans to buy the Chicago-based Navteq Corp. (NVT), a leading digital mapmaker, for about $8.1 billion.
The proposed deal at $78 a share would be Finland-based Nokia's biggest purchase, and followed Nokia's acquisition of mobile-advertiser Enpocket. Initially, analysts viewed the Navteq purchase as a shot-across-the bow of Apple Inc., (AAPL), whose new and much-hyped iPhone comes equipped with mapping and navigation provided by Google Inc. (GOOG). But it also put an immense amount of pressure on Garmin, whose shares were pounded by investors who believed the Nokia-Navteq marriage would hamstring the fast-growing GPS maker. Investors were exceptionally disappointed that Garmin didn't strike first, and didn't even try to turn the bidding for Navteq into a two-horse race.
Navteq provides digital map information for automobile navigation systems, mobile phones and devices and Web sites, and Garmin is a major customer. Navteq also owns Traffic.com, an interactive Web site that gives users up-to-the-minute traffic information in their area. Navteq generated revenue of $582 million last year, Nokia said.
"Location-based services are one of the cornerstones of Nokia's Internet services strategy. The acquisition of NAVTEQ is another step toward Nokia becoming a leading player in this space," Olli-Pekka Kallasvuo, Nokia's president and chief executive, said when the deal was announced. "By joining forces with Navteq, we will be able to bring context and geographical information to a number of our Internet services with accelerated time to market. We also look forward to maintaining and enhancing the services and support provided to Navteq's existing and future customers."
The deal won't be completed until next year. But the agreement was enough to spook Garmin shareholders: Within days of the announced Nokia-Navteq tie-up, Garmin's shares – which had reached a new high of $122.78 – had plunged by more than $26 each, and were trading at less than $97.
The investor trepidation was palpable – and also understandable. Nokia was already a powerhouse, and recent statistics show that it is only getting stronger. The 111.7 million phone handsets it shipped between July and October were part of a strong global mobile phone market, industry analysts say. The gain was greater than the increases from the other four top suppliers combined, and lifted Nokia's market share to 39.5% in the third quarter, from 37.9% in the second.
In other words, by the end of the third quarter, Nokia accounted for nearly four out of every 10 wireless phone assets worldwide. Nokia unit sales had grown 10.8% from the second quarter to the third, while the global mobile phone market in general grew 6.4% – a healthy advance, but nowhere near the growth rate of the market leader.
"Nokia is capitalizing on the increasing popularity ofiSuppli analyst Tina Teng said "The company's shipments of convergence mobile phones that integrate multimedia and smart-phone features grew by 53.8% in the third quarter of 2007 compared to the same period in 2006."
Nokia's third-quarter operating margin was also more than double that of its rivals – an exceptionally healthy 22.2% for Nokia, versus a 10.5% average for the Top 5 handset suppliers.
Garmin executives knew their company couldn't afford to stand pat.
Mapping Out a Digital Deal
Industry observers have been predicting a bidding battle for Tele Atlas ever since Nokia appeared to lock up Navteq – the only other major digital mapping company with operations worldwide. On the conference call with analysts, Kao, the Garmin CEO, conceded that the competitive pressures basically made the company's leaders feel as if they had to launch a bid for Tele Atlas.
"Historically, Garmin believed that an independent, competitive map duopoly served the industry well," Kao said. "However, in the absence of this independent and competitive method of operating, Garmin must exercise its obligation to provide market leadership."
It also had to exercise its obligation to protect its shareholders.
As the company's quarterly financial report shows, Garmin is a growth-and-profit machine. To maintain that position of industry leadership, however, Garmin has to evolve. And that means looking for additional growth opportunities.
Garmin says the acquisition of Tele Atlas will help it expand into such new markets as cars and trucks, and "enterprise," where global positioning systems are used by firms involved in logistics, package-delivery, and shipping. Utilities are increasingly relying on both GPS and digital-mapping technologies to control costs and provide better service.
So it follows that the battle for Tele Atlas figures to be a fierce one, and for two key reasons:
- First, Tele Atlas is the last independent global map provider – save for Navteq, which experts believe Nokia has essentially locked up.
- And, second, the makers of GPS devices and related navigation systems have come to realize that it is crucial to have control of the digital mapping technology their products are designed around.
That pits TomTom against Garmin.
Known for its clever TV commercials and catchy name, TomTom is Europe's largest maker of navigation devices, but the Cayman Islands-based Garmin has a bigger U.S. market share and is larger, overall. Tele Atlas had agreed to be bought by the Amsterdam-based TomTom for $2.6 billion, about 15% less than the $3.31 billion Garmin is planning to offer.
Garmin – which says it already has secured financing commitments for the deal – will officially launch its offer by Dec. 4, the day TomTom's offer for Tele Atlas is scheduled to expire, Reuters reported.
Ironically, it was TomTom that touched off the consolidation cycle in the high-growth digital mapping sector back in July, when it said it would buy Tele Atlas for $30.63 per share. Tele Atlas had already publicly backed the TomTom bid, but yesterday said it was reviewing Garmin's higher bid of $35.31. Indeed, that review is basically a given, since Tele Atlas has a fiduciary responsibility to its shareholders to get the best possible deal if it decides to sell out.
And a spokesman for TomTom told The Associated Press that The Netherlands company was also studying Garmin's higher bid, and said his firm would have a reply "in the near future" – whether that took "several hours or several days." The spokesman declined to answer the how TomTom will address the hard choice it now faces: It can either risk losing Tele Atlas by standing pat, or can raise its bid – if its executives feel they have the financial ability to do so.
TomTom shares plunged 19% in Amsterdam at the prospect, while the U.S.-listed Tele Atlas shares rose $5.45 each, or 15.91%, to close at $39.70 – a sign that investors are speculating the bidding will go higher before the final deal is reached.
Tele Atlas' shares have traded above TomTom's offer price since early October, when Nokia made its bid for Navteq, as investors speculated Garmin – or another player, such as Google Inc. (GOOG), Microsoft Corp. (MSFT) or Motorola Inc. (MOT) – might enter the bidding war, or that TomTom would at least have to sweeten its offer.
David Niederman, a senior analyst with Pacific Crest Securities, said it was impossible to say whether TomTom will launch a higher bid. TomTom has the financial capacity to boost its bid. As the largest single customer of Tele Atlas, it is probably a better strategic fit. Conversely, Garmin relies heavily on Navteq maps and technology, and in an ideal world would have preferred a merger with its own partner. But the Nokia-Navteq agreement makes that all but impossible.
Garmin's market capitalization is four times greater than that of TomTom, and it has the financial resources to outbid the Dutch company in an all-out bidding war if it were determined to do so, Niederman told The AP.
"Tele Atlas operates at a loss," he said. "There's a question of the ‘winner's curse' here. No one wants to win regardless of price, and TomTom could just walk away."
When asked to justify the financial logic for the deal, Kao, the Garmin CEO, said that owning a mapmaker will allow for much better integration of the digital maps with the products that display them – a strategic argument that Nokia and TomTom executives have made previously.
What remains unspoken, however, are the fears about having to buy maps from a rival who now controls both the products and the technology. And that fear is clearly playing a major role, whether the companies concede the point or not. Both Nokia and TomTom have given assurances that – once they win their respective takeover battles – they would continue to sell maps and related products to anyone that wishes to buy them; Garmin voiced similar assurances yesterday.
During the conference call with analysts, Kevin Rauckman, Garmin's chief financial officer, acknowledged that the bidding by TomTom and Nokia sped up his company's decision to pursue Tele Atlas.
"Given the significant changes that have just taken place recently in the industry in the last 90 days…we just really believe that now is the right time for us to combine with a mapping supplier," Rauckman told analysts.
Garmin had actually looked at what it would take to develop its own mapping database – but ultimately decided the venture would be far too expensive, Rauckman conceded to analysts.
The Analysts Weigh In
Felix Oberdorfer, an analyst at Fortis Bank, told MarketWatch that it is "quite speculative" to predict who will end up with Tele Atlas. Even so, he believes that the deal is essential for TomTom, while it's more of a defensive maneuver for Garmin.
In a separate interview with MarketWatch, Yair Reiner, an analyst with CIBC, said that – should TomTom view a tie-up with Tele Atlas as "a matter of life and death," and be willing to stretch its financial resources to the limit to acquire it – Garmin might actually be forced to pay more than $57.86 a share to actually win the bidding battle. That represents a 64% premium over its current offer of $35.31.
Should Garmin lose that bidding battle for Tele Atlas, its Price/Earnings (P/E) ratio would collapse to a range of 15 to 20 times 2008 earnings, Reiner warned. However, should Garmin emerge victorious, with Tele Atlas "under its wing," Garmin's shares would easily trade at 30 to 35 times 2008 earnings. But if a third party such as Google or Microsoft were to enter the fray, and walk away with Tele Atlas, Garmin's P/E multiple would still contract, but by a smaller percentage, given that these other potential suitors are not direct competitors, Reiner said during the interview.
Garmin stock dropped $7.39 or 6.88% Thursday.
News and Related Story Links:
- San Jose Mercury News:
Garmin Offers $3.3 Billion for Netherlands' Tele Atlas, Besting TomTom's Bid.
Tele Atlas Says TomTom Needs to Match Garmin Bid.
Garmin [rated] "Outperform," Target Price Raised.
- Business Week:
S&P Picks and Pans: Corning, Clorox, Garmin, RealNetworks.
- iSuppli Market Research Report:
- Bloomberg News:
Garmin Climbs on Speculation Microsoft Will Buy It.
- Money Morning News:
Microsoft Eyeing GPS-Maker Garmin, Analyst Reports.
- Money Morning News:
Garmin Shares Rebound After Analyst Says Fears of Nokia-Navteq Are Overblown.
- Information Week: .
- Information Week:
- Money Morning News:
Nokia buys mobile advertiser Enpocket, T-Mobile buys SunCom.
- Money Morning News:
Savaged Garmin Battles Back With Cell Phone Navigation Software.
- Money Morning News:
Nokia Announces $8.1 Billion Acquisition of Navteq.
- Information Week:
The Official Global GPS Geocaching Cache Hunt Site.
Geocaching Garmin Style.
- JMP Securities:
Senior Analyst Ingrid Ebeling.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.