Mr. Market has no love for Garmin (GRMN)
Mr. Market is an Idiot. On June 21st, I posted an article “Thinking About Garmin” in which I proposed that Garmin is uniquely positioned as the leader in a technology that is “crossing the chasm” from early adopter to mainstream. I was expecting a stellar earning report this week, which is exactly what Garmin delivered. Only to see the stock go down.
So I took another look at my analysis.
In my analysis I suggested that if, in fact, auto GPS units were on that kind of growth curve, we should at the very least see growth rates continue, and I suggested that conservatively, we should see quarter revenues for April 2007 (9 months from now) at $453 million with an operating income of about $140 million on 1.25 million units. Let me stress - this was my forecast for conservative numbers based on my take on the state of the GPS market.
This quarter Garmin delivered revenues of $432 million with operating income of $134 million on 1.28 million units. In other words - they are already within 5% of my prediction for 9 months from now!
Now, let me throw some more facts into the mix:
- On Amazon.com, the top 7 products in GPS and navigation were Garmin, 17 of the top 20 were Garmin. The top GPS is ranked #13 overall in electronics (that’s the entire category).
- Garmin announced surprising growth in Europe. In my forecast I had written off Europe as “owned” by Tom-Tom, but they’ve had supplier troubles. You have to go to #6 on Amazon.co.uk to find a Garmin unit, but they do have 5 of the top 15. They are investing in Europe, so it looks like they’re not going to give up that market without a fight.
- Garmin has opened a second assembly line and seems very focused on switching to “mass market” mode on GPS’s. Shaving costs might help them keep margins from dropping too quickly.
- Garmin’s stock is splitting this month.
In short, my “blue sky” estimates in June are looking increasingly conservative.
So why has the stock gone down?
Two possibilities come to mind:
- I am missing something in my analysis. Some hidden flaw in the company or market that the market sees that I don’t.
- Mr. Market is an idiot.
I’ll be honest, I’m usually pretty skeptical of my own ability to analyze these situations. Yet no matter how I look at this one, everything I see supports my fundamental theory: that auto GPS sales are skyrocketing, and will continue to do so for some time because market penetration is still very low. I believe GPS units are going to be among the most popular gifts this holiday season, and that Garmin is going to have a virtual lock in the U.S. - with their increased marketing and existing mindshare there isn’t time for anybody who can make a dent in this timeframe - retailers are probably already placing their holiday season orders. Garmin is going to own the shelf space.
Every rental company is going to be offering GPS units, and Garmin just signed Avis and Budget (Magellan has Hertz but failed terribly to capitalize on it).
I recently proposed “The Stupid Markets Theory” that suggests that the driving force in market prices in human stupidity, and I think Garmin is going to prove the point. Because sometime in the next six months their numbers are going to be so obscenely good that whoever it is whose been selling (and thus keeping prices down) is going to be kicking themselves in a big way.
Dan Appleman is a veteran author and entrepreneur who is currently writing on investment and personal finance issues as a form of self-imposed homework under the principle that the best way to learn is to teach. Read more of Dan's work at ThinkingAboutMoney.com.
16 Comments Add your ownSubscribe
1. Nathan | August 7th, 2006 at 7:13 pm
GRMN looks quite good to me in the chart. Maybe I will take your advice and buy some. I think market should be rallying latest by early September.
Mr.Market can be irrational longer than anyone can expect. However irrational, current price is always the right price (for that particular second only).
2. Everysec | August 7th, 2006 at 7:57 pm
Excellent analysis and article. GPS is hitting the big time alright and Garmin have no real big challenger yet. With so many new cars coming with GPS navigation built in, there is only going to be more demand for their products. Could do with getting a few more like the Chrysler (http://www.forbes.com/markets/2005/01/28/0128automarketscan13.html) deal though to really sky rocket.
3. Dan | August 7th, 2006 at 8:18 pm
Timing is always hard to figure. My take on it is that there are three key dates to watch for:
1. August 15th. Once the stock splits, the share price will be in the $50 range. Though splitting a stock has no clear correlation to an increase in price, there is a psychological impact - if only in that it expresses faith on the part of management that the company will continue to do well.
2. Early November. Expect a steller quarter. I don’t think Garmin’s management would say in their guidance that they plan to meet or beat forecasts unless they plan to beat them by a lot. Frankly, I’ve been quite impressed by their management based on their actions.
3. Sometime in February -the quarterly report should be insane - because this will be the first holiday season where aftermarket GPS’s will be on the other side of the chasm. Last year they had 3 shift full capacity manufacturing to meet demand - and since then they have significnatly upped manufacturing capacity.
I got a kick out of their annoucement of a stock buyback. The numbers are tiny - not nearly enough to impact the share price in and of themselves. I think it was just their way of telling Mr. Market “hey, pay attention Bozo - we’ve got game”.
4. Chris | August 7th, 2006 at 10:12 pm
I also don’t understand why slowed growth is just now starting to be impacting the price. When I did my analysis on the stock a couple months ago, the analyst growth estimates were only 15%.
Of course a multi-billion dollar company can’t grow 25% annually forever, but at 15% I would still be willing to pay a 25-30 multiple, especially given management’s consistancy.
5. Dan | August 7th, 2006 at 10:36 pm
Well, this is the heart of the question. It looks like many analysts feel that Garmin has reached that point - where it can’t grow 25% annually (By the way, both sales and earnings growth for this quarter were 60%+ from last year).
My thesis is that they have grossly miscalculated with regards to market penetration. Here’s a simple question: How many of your friends know what a auto GPS is and what it does? I’ll bet almost all of them. How many of them do not yet have one? I’ll bet the vast majority.
This is the perfect formula for crossing the chasm.
Garmin sold about 1.2 million GPS units world wide last quarter.
U.S. auto sales are 16 million/year - most of which do not yet come with GPS units - and that doesn’t even count the hundreds of millions of vehicles on the road that could use an aftermarket GPS.
How long can Garmin continue 60%+ growth rate? Hard to say - who knows what the peak of market penetration will be (ultimately I think every car will have a GPS - they are just too useful). Can they continue for another year? Easy. Two years? Probably.
The analysts are right with their call - they’re just 2 or 3 years too early.
6. Chris | August 7th, 2006 at 10:55 pm
In the meantime I picked up more at 87.15. Thanks Mr. Market, you silly old fool!
7. Vince | August 8th, 2006 at 11:58 pm
Hi Dan,
Do you have any insight as to how Garmin books its revenue? Upon shipment to distributors? or using another method (upon sale)? Just wondering about the timing of their revenue booking.
On a side note, me being from Singapore. The “slang” for Government is “Garmen” or “Garmin” however you spell it as in “The Garmin doesn’t listen to the people” =)
8. Dan | August 9th, 2006 at 12:42 am
Shipment to distributers (as is common for similar companies).
9. Doug | August 9th, 2006 at 4:40 am
How many options outstanding does the company have? How many are being granted annually? How is the trend of options grants developing? Given the rise in price that is expected, these all have to be added to the common.
10. Dan | August 9th, 2006 at 1:51 pm
About 3.5 million outstanding (out of 109 million). Grants are 300k-500k/quarter. It looks like the company is buying back stock at or slightly higher than the rate at which it is granting options.
Dilution impacts the earnings by 1-2 cents per share.
11. CrossProfit | August 11th, 2006 at 3:27 pm
Time will tell if you are right. In the meantime take a look at this;
http://stocksadvice.blogspot.com/
“… the earnings and guidance were phenomenal. But considering this stock is up so much when the market has been in doldrums most of the year, the market expected nothing short of a miracle from Garmin…”
Also on the macro scene a recession is on the table again as signaled by the Fed’s pause.
See;
http://247wallst.blogspot.com/2006/08/save-world-economy-on-your-own-time.html
Disclosure: This is a personal comment by a CrossProfit analyst and may not reflect the opinion of CrossProfit.com.
http://www.crossprofit.com
12. Alan | August 19th, 2006 at 12:55 am
As a non-analyst but former Garmin employee, I can lend some insight to the situation. My insight is that there is absolutely no explanation why Garmin’s success has not translated to an even more meteoric rise in the stock price. As a matter of fact, here’s a quiet tip: wait until the next quarterly report to buy Garmin. The price has dropped anywhere from 1-6% the day following the earnings report every quarter for the last 7 quarters. It’s like the market can’t believe they are STILL doing good. Like they are just waiting for the bottom to fall out. They have something around 5 quarters over the past NINE YEARS (going back to pre-IPO) in which it wasn’t the best quarter in the company’s history. Some might say that it is nothing more than an indicator of the down-side to come. I believe, and agree with Dan above, the analysis are conservatively predicting now what will probably be another 2-5 years to come.
And believe everything you read about Garmin management. The culture has been built on under-promising and over-delivering. If they say they will do it, you better believe they will - and then some. The company was built on Gary Burrell and his vision and ethic. Once he retired, rather than fade with his legacy, the company saw it as an opportunity to build upon by shedding his mild conservatism and going on the offensive. Case in point:
-Garmin’s NFL Sunday commercials to combat Tom-Tom’s marketing outburst,
-the recent addition of a company retail outlet on Michigan Ave. in Chicago (right between Nike and I-Pod),
-the purchase of UPSAT to strengthen their already dominant aviation division,
-the compilation of second-tier OEM deals (BMW/Harley/Honda motorcycles, Budget/Avis rent-a-car, Cessna/Diamond/Honda/Cirrus aircraft, Chrysler aftermarket, etc)
-the purchase of website “MotionBase” to strengthen the fitness market,
-the addition (doubling) of manufacturing capacity in Taiwan,
bringing suit against Tom-Tom for patent infringement,
need I go on???
Believe me, this is not blind faith. I kept waiting for the bottom to fall out. Every time I think you can’t package a GPS in any other form possible, and thus their competitive differentiator as “innovator” potentially lost, they break the mold and grab another piece of the market, build on a piece they have, or invent a market out of thin air. Not to mention their combined markets are still a fraction of the worldwide potential of all GPS possibilities. I’m still waiting for them to reach up and grab the most obvious and largest opportunity dangling in front of them for the near future… As soon as they land a contract for an in-dash navigation system with a major automotive OEM, they’ll leave the atmosphere.
(then maybe we can start talking about falling stars…)
13. 48f1f8042e990618567eb697f&hellip | January 6th, 2007 at 6:05 am
48f1f8042e990618567e…
48f1f8042e990618567eb697f6c6423248f1f8042e99…
14. trmadol | January 25th, 2007 at 10:47 am
I always have terrible trouble with comment-related plugins that require me to put some line in the comment loop; I can never seem to find the right spot. Can anyone tell me where I should put the php line in my comments loop? I haven not modified anything much, and I would be very grateful. Thanks!
15. Cheap soma.&hellip | November 30th, 2007 at 5:00 pm
Soma without prescription 180 count….
Cheap soma. Soma. Pornstar soma. Buy soma watson brand online 150 tablets. Soma and addiction. Prescription medication side effects for soma….
16. richard mcconaughey | May 10th, 2008 at 10:26 am
richard mcconaughey of gloucester hmrc revenue and customs is a convicted rapist
Leave a Comment
Some HTML allowed:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>
Trackback this post | Subscribe to the comments via RSS Feed