Q: What's the outlook for Garmin Ltd., the GPS system maker?
- Reader Diane Begue of Medina, Ohio
Garmin Ltd. (Nasdaq: GRMN), a leading producer of global-positioning systems, has a strong market position, meaning its stock should deliver nice profits if purchased at the current low valuation.
It was just about midnight, on a chilly and rainy Dec. 10, when the diesel engine of my 42-foot sailboat, "Southern Cross," suddenly stopped dead in the middle of the Delaware Channel, just north of the Elbow of Cross Ledge, two thirds of the way up the Delaware Bay from Cape May.
I knew I was in trouble.
The green-and-red bow lights of a big freighter less than a mile behind me indicated that I was smack in the middle of his intended course. And with my 11-year-old daughter sleeping deeply down below as my sole company on board – and I was powerless and adrift in one of the most-narrow shipping channels with the highest freighter traffic in the world – I understood that I had to react fast.
Within a couple of minutes I had my mainsail up and was able to steer clear of the channel, as I was being hailed over the Marine VHF radio band by the freighter whose captain realized that I had trouble and was tracking my navigation lights visually and my course and distance via his radar. With the immediate danger resolved, I needed help to re-fire the motor and then to navigate in the middle of a rainstorm that featured the additional challenges of poor visibility and a brisk breeze. Without any help on board, I had resort to sail power. And I would have to get under way, and under sail, by running parallel to – but outside of – the channel, and to keep from running aground, despite my deep nine-foot draft.
Just a few years ago, this would have been thought too risky, or downright impossible, forcing me to drop anchor outside the channel, and then to radio for help. Fortunately, however, I'd brought along my state-of-the-art handheld Garmin GPSMAP 478 course-plotting global-positioning system. Made by Garmin Ltd. (Nasdaq: GRMN), the Cayman Islands-based leader in portable navigation systems, the marine GPS unit enabled me to confidently steer my course, outside the channel. By watching the chart displayed on the unit's bright screen, I watched my sailboat's progress, watching the channel details and depth readings as I did so.
I realized that I must call Sea Tow – the AAA of the sea – immediately, if I wanted to get assistance getting my engine restarted. My Garmin GPS unit quickly allowed me to find all the Sea Tow locations, their distance from my location, and their telephone numbers. I called the nearest one, and agreed to a rendezvous a few hours later some 23 miles up-river to resolve the engine problem and then to continue safely to my destination.
Indeed, global-positioning system technology has revolutionized navigation at sea, in the air, and on land. And with my Garmin unit, you know exactly where you are at sea or on land. By watching your progress as it's tracked on the GPS map display, you always know your location.
Advanced features allow you to follow the fastest, direct and alternative routes around congestion, as you see fit. And the systems take into account historical and increasingly real-time traffic information on land, and also tell you about hotels, gas stations, ATMs and other nearby points of interest.
As GPS sales exploded in recent years, Garmin saw its stock price soar by nearly 500%. But the field has become much more crowded. While Garmin took the early lead and has a market share of more than 50%, rivals are gaining.
Last year, the Amsterdam-based TomTom NV made a splash with its own devices, which permitted the user to enter a destination address by voice – and which featured a lower selling price. This year Garmin has leapfrogged again, this time by rivaling offerings featuring more-accurate and more-versatile voice-recognition capabilities.
Clearly, the technological leapfrogging, like voice-recognition technology and real-time traffic data is creating more market-share volatility, even as market saturation and increased competition is bringing the prices down. To make matters worse, mobile phones – such as the Apple Inc. (Nasdaq: AAPL) iPhone, and others made by such firms as Nokia Corp. (ADR: NOK) – are adding land-navigation capabilities. This has forced Garmin to strike back by entering the mobile phone market. This proposition is easier said than done, since penetrating this ultra-competitive market is extremely difficult and the rivals in the mobile-phone sector are goliaths.
In this environment, predicting a technological winner is difficult. And it is easy to see that profit margins and sales growth rates by manufacturer are going to keep getting compressed by endless competition.
Already we have seen Garmin miss reduced earnings estimates in the last quarter. And of U.S. digital-mapping king Navteq Corp. (NYSE: NVT) highlights the rising competition. But Garmin isn't rolling over and will not let its lead go without a fight. It first tried to acquire a digital-mapping company of its own. When that failed – in Garmin's typical aggressive fashion – it refused to give up and resorted to a well-thought-out Plan B.
Garmin locked up a long-term deal with Navteq – despite the sale. Then it signed up for the mapping firm's real-time traffic services. And it continues to consider other services to offer customers – hoping to improve both its margins and its overall profitability.
While the long-term situation in electronics is always one of flux and needs to be monitored closely, the reality is that Garmin's shares have taken a dramatic beating, plunging 73% from their all-time high of $125.68. Garmin shares closed Friday at $34.46, up 82 cents, or 2.44%.
With a current Price/Earnings Ratio of 8.3, a forward P/E of 9.7 and a Price/Earnings to Grow Rate (PEG) ratio of about 0.5 – and with the Christmas shopping season looming – Garmin is now a value stock with strong growth to come.
The current "doomsday-scenario" pricing doomsday scenario pricing sets an absurdly low bar for an industry leader to jump over, meaning the stock represents a solid – if not downright attractive – value at these levels.
Now featuring the top voice-recognition technology, and adding other important features and services, Garmin is demonstrating a bare-fisted response to competitive changes has underscored a willingness to defense its market leadership. Buy this high-tech growth stock at a value-stock valuation.
Action to Take: Buy Garmin Ltd (Nasdaq: GRMN) for its GPS-market leadership. At current levels, you're buying a high-growth stock at low-growth, value-stock valuations. It's too much of a bargain to ignore. **
[Editor's Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises – cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you, with his newly created "Shadow Stock Trader" specialized trading service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a new Money Morning feature that has most recently analyzed such companies as Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), . (Nasdaq: CS), . (NYSE: CVX), Valero Energy Corp. (NYSE: VLO), General Electric Co. (NYSE: GE), and steelmaker Nucor Corp. (NYSE: NUE).]
** Special Note of Disclosure: Horacio Marquez holds no interest in Garmin Ltd.
News and Related Story Links:
- Money Morning News:
- Sea Tow: Web Site.
- Money Morning News:
GPS-Maker Garmin Sees its Shares Plummet on Profit Worries.
Global Positioning Systems.
Marine VHF radio band.
Garmin GPSMAP 478.
Voice/Speaker Recognition Technology.
- Money Morning News:
Garmin Withdraws Tele Atlas Bid; May Become Takeover Target.