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GRMN AT A GLANCE

P/E ► 9.78 AVG EV/EBITDA ► 8.28 AVG ROA ► 17.9% VERY HIGH ROE ► 24.8% AVG Debt to Equity ► 0.376 VERY LOW Current Ratio ► 2.92 VERY HIGH Interest Coverage Ratio ► 1K VERY HIGH

 

 

 

 

 

 

If you have ever driven a car with a GPS system (installed or portable), then you are probably one of Garmin's many unsuspecting customers. Garmin has streamlined the navigation process by developing and marketing intuitive portable navigation devices (PND) for cars, planes, boats and pedestrians. The company sells its products directly to original equipment manufacturers such as automakers and airplane manufacturers, as well as to consumers through mass retailers like Wal-Mart Stores (WMT), Best Buy (BBY) and Amazon.com (AMZN).

The consumer GPS market was once limited to the wealthy, but increased competition from low-cost overseas manufacturers (Mio) in combination with Garmin's engineering and manufacturing expertise has helped to bring the cost of GPS devices to an affordable level. Garmin sells its products through a network of distributors such as Best Buy, Wal-Mart, and Costco, making its sales dependent upon the business of those retailers.^[1]

The company will face significant challenges in trying to extend its dominance to other markets. Europeans, for example, have enjoyed the conveniences of GPS devices for a considerable time, and as a late entrant, Garmin faces stiff competition from incumbents and new market entrants.^[2] In the first quarter of 2009, GRMN showed some success in this area from the first quarter of 2008, as the share of total sales that occurred in North America fell by 1.35%.^[3] In 2008, research and development expenses rose 29.3% from 2007 causing net income to fall even though sales increased.^[4]

Business Overview

Business & Financial Metrics

Garmin is the leading manufacturer of global positioning system (GPS) devices worldwide, with over 50% market share. Garmin has demonstrated strong average year over year revenue growth of 53% compounded annual growth rate each year since 2004. While Garmin has consistently turned a profit, its operating margin has eroded by 4% reflecting a fundamental shift in its revenue mix. Much of Garmin's growth has been driven by its lower margin automobile/mobile segment.

Business Segments

Outdoor/Fitness ($132 million in net sales, 16.9% of total revenues for 3Q09)

Garmin offers a number of portable GPS products designed for outdoor activities such as hiking, hunting, camping, running, biking and city exploring. Outdoor/Fitness revenue grew by 20% in 2006 to $285 million. Personal navigation devices (PNDs), which are handheld units used mainly by outdoor enthusiasts, make up 20% of sales.

Marine ($45 million in net sales, 5.8% of total revenues for 3Q09)

Garmin offers a wide variety of built-in and portable electronics for the marine market. Its product line includes GPS chartplotters, sonar fish-finders, real-time weather receivers, sounders and radars. This business is Garmin's smallest and growth is expected to increase in 2007 following the planned release of 37 new products.

Automotive/Mobile ($546 million in net sales, 69.9% of total revenues for 3Q09)

The automotive/mobile segment, which encompasses Garmin's portfolio of GPS-enabled portable navigation devices, is the most important part of the company's business in terms of both contribution and growth. Automotive accounts for 70% of revenues. In 2006, Garmin's PND sales grew 170% year-over-year to reach $1.1 billion.

Aviation ($58 million in net sales, 7.4% of total revenues for 3Q09)

Garmin started off as an avionics company and remains the leading player in the sub-markets where it has chosen to compete, including the emerging micro-jet space. Garmin's avionics business was flat in 2006. Garmin's venerable aviation unit, 10% of sales, builds devices for use in aircraft cockpits, enabling GPS-based navigation, very high frequency (VHF) communications transmitters/receivers, multi-function displays, receivers, and more.

R&D Spending

With a signification proportion of revenue invested in R&D, Garmin has outmaneuvered perennial electronic leaders such as Sony (SNE) that have attempted to make forays in the GPS market. The company has not only been able to produce three times as many PND models as its closest competitor, but has also received consistent high praise from consumers for the ruggedness and user-friendliness of its products. Garmin's PND product portfolio is occasionally criticized for being too broad, and lacking focus, but in a high-growth, relatively young market, a broad portfolio provides Garmin with a chance of hitting upon an unexpected blockbuster.

Key Trends/Forces

Economic Factors

Consumer spending on non-essential goods such as Garmin's GPS devices is discretionary in nature. In times of economic recession consumer's quickly decrease expenditure on luxury items. In 2007, both the real estate and credit markets were severely affected by the subprime lending crises. Consumers were faced with an inability to draw on equity in their home to fund purchases. Additionally, other economic factors like the price of oil which consistently fluctuate have further limited disposable income available for discretionary purchases.

Potential Market

Global penetration rates for GPS devices are very low; in 2007, around 10% of the 35 million new cars projected to be sold in Western Europe and North America came with pre-installed GPS systems leaving a large potential consumer base looking for after-market GPS solutions.^[5] Of the 430-450 million cars on the road in North America and Western Europe, only about 3% had in-dash navigation systems leaving Garmin with an addressable market of well over 400 million vehicles. ^[6] The market will only grow as manufacturing volumes increase and price points fall turning GPS systems into an affordable gadget.

Commodization

GPS prices have fallen quickly over the last two years and will continue to do so. As key components, such as semiconductor chips and LCD displays, drop, companies will compete more on price since key features (text-to-voice, bluetooth) will become standard in an increasingly commoditized industry.

To fight against commodization, GPS companies have also begun loading devices with new features such as real-time traffic and weather data along with more in-depth information on restaurants, hotesl and gas stations. ^[7]

Black Friday (day after Thanksgiving), the biggest sale day in the United States, exhibited the GPS manufacturers inclination to drop prices to attract business. Manufacturers cut prices on selected items by 35 to 50%. TomTom, Mio and Navigon chose essentially to discount their entry level device while Garmin and Magellan adopted another strategy with sales at different price points in their product range. ^[8]

Rising Energy Prices

The shrinking fossil fuel supply combined with the growing energy demands from developing countries, such as China, has dramatically driven up fossil fuel prices. China’s demand for fuel is projected to increase by 150 percent by 2020, a rate of 7.5% per year, seven times faster than the U.S. As a result, drivers are trying to find solutions to reduce fuel consumption and save time. A recent poll conducted by Circuit City found that 71% of drivers believe that a GPS system can help them save time and lower fuel costs. The impetus to purchase a GPS system will only increase as gas prices rise.^[9]

Relatively Low Barriers to Entry for Established Consumer Electronics Companies

GPS devices will primarily be sold through electronics retailers and websites, channels that larger consumer electronics manufacturers know quite well. As the GPS markets tracks towards mass-market adoption, there is an expectation for large tradition consumer electronic manufacturers to view the space as incrementally more attractive because they can begin to gain economies of scale in manufacturing. With more competitors and increased pricing pressure, Garmin along with other competitors will face margin compression.

Smartphones Stealing Market Share

In the 1st Q of 2009, GRMN's unit sales fell 13%, at least in part from competition from smartphones.^[10] Smartphones have become a large portion of the cell phone market. However, these phones, made by companies such as Apple, RIMM, and Palm, have stolen market share in the GPS market as well because they possess the capabilities to give users directions. The cell phone service providers have given users the ability to download applications on to their phones that provide directions. This hurts GRMN's future prospects because as smartphones become more and more popular because consumers will have no reason to buy a GPS device in addition to their smartphones.

Competition

This space is an extremely contested one. Prices on GPS devices are falling rapidly - Garmin's gross margin has fallen from 58% in 2003 down to 46% in 2007. If these devices level out at standard consumer electronics margin levels, Garmin is looking at a high 20% gross margin in a few years, which will significantly erode profits. In addition to direct competitor TomTom, the big consumer electronics companies like Sony (SNE) and LG Electronics have begun to introduce GPS units of their own. More competition leads to lower prices and increased spending on marketing and R&D to stay a step ahead. There are few ways for Garmin to build a lasting moat around their business. What's more, many believe the PND category is threatened by cellular phones, several of which now have GPS capability. While Garmin is planning to introduce the a GPS mobile phone named Nüvifone in the first quarter of 2009, it will be difficult for them to compete in this space with little experience and established competition like Nokia (NOK) and Apple (AAPL). However, the Apple iPhone is exclusive to the AT&T network until 2012 which could provide a niche market for the Nüvifone on other mobile networks in the United States. Despite other mobile phone companies trying to copy the iPhone, all have failed to approach the functionality of the iPhone. Garmin believes their Nüvifone could be the antidote.

TomTom

TomTom is the world's leading provider of portable navigation devices. It has over 50% market share in Europe and about 20% in the U.S. It has been in Europe since the early 1990s and entered the U.S. market in 2005. In counterpoint to Garmin's broad portfolio, its PND line is limited to a handful of clearly differentiated models.

Magellan

Magellan sells navigation products for driving, hiking, camping and boating. The company was bought by a private group of investors.

Polar

Polar is a leading brand in portable electronics for fitness and is best known for introducing the first wireless heart-rate monitor. Its devices are used by professional athletes and amateurs for running, cycling and other outdoor sports.

Consumer Electronic Companies

Brands such as Sony (SNE) , Phillips and Uniden has managed to enter the PND market, but none of them have grabbed any significant market share.

References

1. ↑ GRMN 2008 10-K pg. 13  
2. ↑ Investor's Business Daily - Garmin Makes Tele Atlas Bid, Beats Views (11/1/07)
3. ↑ GRMN Q1 2009 10-Q (March 31, 2009).
4. ↑ GRMN 2008 10-K pg. 35  
5. ↑ Investors Business Daily - Digital Map Maker Plots A Course To Your Car And Your Cell Phone (8/16/07)
6. ↑ NAVTEQ Q4 2005 Conference Call
7. ↑ Newsweek - Can Garmin Maintain GPS Lead? (11/19/07)
8. ↑ 2007 U.S. Black Friday
9. ↑ Circuit City Poll - 71% Say GPS Can Save Time, Lower Fuel Costs
10. ↑ Jenna Wortham (July 10, 2009). Smartphones Are Eclipsing GPS Devices. NewsFactor.com.