At $35, Google Finance puts the Garmin PE at ~8.5. That’s just too low for a company with 25% annual growth.

I made some money riding this stock from about $45 to $80. I kicked myself for not holding it to $120. I bought some up there and was quickly stopped out for a small loss. And now I’m glad I haven’t owned it for a while and have a chance to back up the truck.

Before I do so, I wonder if anyone out there can tell me what I’m missing. Here are some reasons for the low GRMN price I’m reading on message boards and blogs:

– iPhones and other smart phones are a hit. Lots of these have navigation software, and so people don’t need a dedicated navigation device.
– Garmin lost the bid for Navteq (who makes the maps) and so is being regulated to the hardware and software end of the business, which is becoming a comodity. So even in the dedicated device space, competition will drive prices lower, etc.

Some Rebuttals

– Cell phone navigation just isn’t as good as what you’ll get using a dedicated GPS unit. Read these articles on how cell phone navigation works vs. GPS unit navigation. The GPS unit will be more accurate at pinpointing your location, will update faster (good when you are driving), and because it uses satellites instead of cell towers will work in more places (like out in the woods where your cell phone won’t work).

– There is still room for improvement and for Garmin to differentiate itself on it’s software. When comparing the Nuvifone to Nokia and Apple phones, it’s not that good of a phone. But when comparing other GPS devices against the Nuvifone, the Nuvifone is a pretty nifty device.

– What’s happening with car sales? People have walkmen, and yet we all have dedicated stereos in our cars. Dedicated GPS units in every car seems like a logical step to me (though the $10/mo charges will hinder things, just as they have with satellite radio).

I think that Garmin can make plenty of money celling GPS units and GPS phones to businesses (airlines, boating), enthusiasts, and in cars. Investors are confusing Garmin’s target market because of this cell phone stuff. I listened to the last earnings call to see if the Garmin management thought this way. I wasn’t very pleased. The call was boring, defensive, and apologetic. Not what I was hoping for.

Sticker Price Math. Then and Now.

My gut tells me that Garmin can make money, but can they really? Look at how much things can change in just one year. Below is some math I wrote up about a year ago to find a “sticker price” for Garmin.

Starting Price: $120
Earnings: $3.80 per share
Growth Rate: 30%
Average PE: 25
Earnings in 10 Years: $35.39 (the current earnings x the growth rate for 10 years)
Price in 10 Years: $884.76 (future earnings x PE of 25)
Sticker: $221.19 (if the stock were at this price, we’d get 15% annual return as it marched to that future price above)
Margin of Safety: $110.59 (a little above the 50% MOS, but close enough for me)

Here’s the picture now:

Starting Price: $35
Earnings: $4.13 per share
Growth Rate: 10%
Average PE: 20
Earnings in 10 Years: $10.71 per share
Price in 10 Years: $214.24
Sticker Price: $53.56
MOS: $26.78

We’re below sticker price, but the MOS is not exactly where we’d want it. So I’ll likely watch the chart and wait for some positive indicators before putting money in. Alternatively, you could buy half a position now and add to it if it hits that MOS at $26.

Main Street. What if Garmin GPS was in 50% of cars sold?

One last piece of math I’ll throw in there. The calculations above are a great way to evaluate a company, but it’s always good to keep the actual business in mind. One of the biggest potential money earners for Garmin is selling GPS units to car manufacturers (and consumers to put in their cars). How much does Garmin make doing this now? How much could they make if every car had a GPS unit and Garmin was 50% of that?

You can view Garmin quarterly and annual reports here. I’ll take some numbers out of the latest quarterly report.

Garmin’s “auto/mobile” segment brought in $451.8 million in revenue, 73% of Garmin’s $663.8m total last quarter. Operating income for the auto unit was $107.6m, making Garmin’s margin on auto/mobile sales about 24%.

I’m going to pull some numbers out my ass… for (1) to simplify the math, but mostly (2) because I don’t have time to research the real numbers. Maybe someone out there does.

We’ll say margin is 25% on auto units and assume that Garmin units sell for an average $400. So for each unit sold, Garmin makes $100. We’re going to assume it is 5 years from now, and every single new car has a GPS unit in it. If there are 10 million new cars sold in the US each year, we’ll say that Garmin can nab 50% of that market for 5 million auto units per year. Now multiply this by 2 because we’ll say US business is only 50% of their business.

10 million cars x $100 profit = $1b profit. Garmin is making $855m in earnings now. And 73% of this is from auto/mobile, right? So I’m missing something here and too tired to figure it out. But it seems that even under these very favorable conditions, Garmin would make about 2-3x what they are now.

That’s a lot of hand waving, but I think a useful place to start your thinking. I’ll keep watching the stock and let you know if I act.