I am currently short GRMN. I believe that while the current years earnings/revenues may be achievable, the company is headed down the wrong path in the wrong industry.
Garmin trades at about 10x consensus FY08 expectations of $3.95. Many will argue that this is simply too cheap for a company with such promising growth prospects and that remains underpenetrated. I, on the other hand, believe that while revenue may continue to increase, margins will continue to be under heavy downward pressure. The onslaught will come from all sides: lower ASPs, more competition, the inability to reduce the bill of materials quickly enough, and the commoditization of GPS (iPhone, Blackberry).
Furthermore, Garmin doesn’t own any of the valuable assets i.e. the maps themselves. In this scenario, Garmin simply becomes a producer of hardware. And now, they find themselves in an unenviable position: what features can we add to our GPS devices that will make them more attractive to consumers? MP3 player? Removable media cards? I, for one, would rather be a handset maker who decides to add GPS to my devices than the other way around.
The problem with something that becomes ubiquitous is that generally it becomes not very profitable unless you have a strategy to prevent others from entering (think iPods and iTunes).
To add insult to injury here. It certainly isn’t helping that the US consumer is hurting or that it seems as if Garmin may be coming close to a saturation point. Add a few missteps relating to the nuviPhone (which really is an absurd idea) and I’m not sure if Garmin will ever find its way again.
One more thing… it frustrates me to no end when I see a management buying back shares as their business deteriorates. Essentially, they are taking shareholder money and burning it.
As for trading this stock, the short interest is high and it tends to find GARP buyers. My strategy has been to short the stock on rallies and leave enough dry powder to scale into a larger position as the valuation becomes more and more untenable. Good luck!
