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GARMIN LTD  (GRMN)

Last Updated: Jul 4, 2008


Business Summary

Garmin designs and manufacturers global positioning system (GPS) devices. The company has three primary product categories. Automotive devices (70% of sales) are usually either in-dash or mounted units. Personal navigation devices (PNDs, 20% of sales) are hand held units used by hikers, hunters, outdoor enthusiasts, etc. Aviation (10% of sales), Garmin's original business, consists of navigation units used in the control panels of aircraft. The company also has a small marine product unit for use in boats. Garmin's products are sold through an extensive network of dealers internationally, including big box retailers Wal-Mart, Best Buy, and Amazon.

Growth Strategy

GPS is a very attractive market with high growth potential. Garmin has delivered a 53% compounded annual revenue growth rate each year since 2004. The market for PNDs is expected to triple over the next 5 years. Only about 10% of automobiles sold in the U.S. and Europe in 2007 had navigation systems built in. This leaves a huge addressable market, and as auto manufacturers continue to compete on features, GPS devices could eventually become commonplace. Garmin is also developing a GPS enabled cellular phone device for release in 2008. Lastly, at a current P/E ratio of about 11 vs. an expected growth rate of 17% annually, Garmin does not have to deliver huge earnings gains to deliver acceptable returns to it's shareholders.

Competitive Position

At present, Garmin has a commanding stature in global GPS devices, holding over a 50% market share. In a market that depends on constant innovation, Garmin has been the leader, leveraging it's R&D expenditures to consistently release a wide variety of new models each year. However, competitive storm clouds circle the company. Top rival TomTom has a majority market share in Europe, and has quickly grabbed 20% of U.S. sales, making them a formidable competitor. Also, GPS devices are becoming commodities, tempting big consumer electronics firms like Sony and LG Electronics to throw their hat in the ring. Low cost Asian companies have been producing deeply discounted units for sale there. Lastly, PNDs are threatened by the possibility of GPS enabled cellular phones encroaching on sales. When this happens, Garmin faces even more tough competition from cell phone makers such as Nokia and Apple.

Risks

Competition is Garmin's biggest risk. Both automotive and PND units have seen steep price declines and prices are predicted to continue coming down. Garmin has seen it's gross margin fall from 58% in 2003 down to 46% in 2007. In Q1 of this year, Garmin reported a 35% decline in average selling price from 2007. Where it will stabilize is anyone's guess, but most electronics become low margin products with gross margin in the mid-20% range. The future for PND devices is uncertain, with many predicting the market will dissolve as cell phones become GPS aware. While Garmin plans to compete in this market, they have no experience in the design, marketing, or carrier relationships in the cell phone industry. At a more macro-economic level, Garmin's products are discretionary and can face the wrong end of the whip when consumers tighten their wallets. Market share gains outside of the U.S. will be more difficult, as TomTom is established in Europe and low cost providers have the upper hand in Asia. Lastly, GPS makers rely on map providers for critical software. The two map providers, TeleAtlas and NAVTEQ, are now owned by competitors TomTom and Nokia, respectively. While Garmin's contract with NAVTEQ runs for some time, the company is at the mercy of competitors when renewing contracts for this critical component of their products.

Management

Management is not a concern. Co-founder, Chairman, and CEO Min Kao is still at the helm. He owns a sizable 20% stake in Garmin, and is actively involved in product development. Executive salaries are quite modest considering recent results. Insider ownership is part of the corporate culture, with executives and board members owning nearly half of the company's shares. Management focuses on free cash flow and return on invested capital - the two things every business should be focused on. In fact, Garmin is one of the few publicly traded companies that breaks out ROIC in their SEC filings. This is an exceptionally well run firm.

Financial Health

Financial health is often a reflection upon management, for better or worse, and that's exactly what we have with Garmin. The tangible proof of great management is evident here. Garmin's balance sheet is rock solid, with 616 million in cash and no debt. The company has been extremely profitable, averaging a 52% return on tangible invested capital over the last 5 years, as well as delivering a sky-high 23% average free cash flow margin. Even more impressive, the company pays a 1.8% dividend yield, incredibly rare for a technology growth stock. No problems here.

MagicDiligence Opinion

MagicDiligence likes Garmin the company quite a bit. Management is exceptional, conservative, and well vested. The company has a fortress for a balance sheet and is surprisingly shareholder friendly for what is essentially a technology growth stock. The market itself is clearly one poised for significant growth over the next 10 years. My only problem is the one thing that concerns me about any investment more than anything else - competition. Rockefeller, Carnegie, Gates, and Buffett all knew that the biggest roadblock to sustained profits is competition. And boy, does the GPS market ever have some serious players! Garmin faces direct competition from TomTom and Magellan. It also faces consumer electronics giants Sony (SNE) and LG, as well as small and cheap Asian producers. It is becoming increasingly likely that the PND market will be swallowed by cell phones with GPS built-in; pitting Garmin against more tough opponents like Nokia (NOK) and Apple (AAPL). With all this competition, selling prices are driven down and costs for marketing and R&D are driven up, killing margins. I think Garmin makes a decent MFI play, especially at such a cheap price, but there are too many competitive concerns to recommend it as a Top Buy.

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