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(Attention Shoppers: Garmin - Now 21% Off!)
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Ryanfreund - Director (Talk | contribs)
(Attention Shoppers: Garmin - Now 21% Off!)

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Garmin (NasdaqGS: GRMN), whose shares closed at a 52-week low of $35.19, is now on the verge of being one of the top value plays on the market today. Investors hammered Garmin in response to lowered guidance and a delay of it’s new smartphone, dubbed “nuvifone.” Was this response an over-reaction?

Yes it was. Keep in mind that the price of a stock always (and I do mean always) both rises and falls faster than the intrinsic value of the company. I don’t really care much for the rises (because I’m not a trader), but the falls - if unnecessarily harsh - present an extraordinary opportunity for long-term value investors to get in with new money, either initiating a position or averaging down. I employ the same strategy for my portfolio (outperforming by 35% annually, ticker FVF), my Small Cap Momentum model portfolio (outperforming by roughly 60% annually), and my Investment Advisor Newsletter (outperforming by 5% annually); and each has outperformed the S&P 500 by quite a bit.

So why Garmin, and why now?

To begin with, Garmin is quite undervalued if you step back and take a look at the whole world’s appetite for GPS equipment. With a forward price-to-earnings, using their 2008 guidance, of just above 8, investors seem to think that Garmin will no longer grow their earnings. I understand their arguments that margins are being pressured by competitors, and that the stalling of the American economy will hurt sales. I both understand and agree with those statements.

But saying Garmin won’t grow earnings in the next 2 years (which is the timeframe I like to look at stocks for) is just insane. Is the market that short-sighted? Apparently, the answer is yes. Sure, they’re taking a gamble on their new smart phones, but what about their tried and true business of selling the very best GPS systems for a growing market of GPS users? Nearly all car manufacturers are now building their cars with room for an in-dash GPS. Out of everyone I know, less than half have a GPS in their car.

Yes, but what about competition?

Competition is certainly part of the equation. There is no doubt that competition is heating up, including pure-play GPS competition like TomTom and non pure-play GPS competition like Apple’s (Nasdaq: AAPL) iPhone. I’m not entirely sure about TomTom’s numbers, but I do know that everyone I know who owns a GPS, owns a Garmin. Not surprisingly, Garmin has overtaken TomTom in global sales, after two years of solid market domination by TomTom.

As for Apple, and other non-pure play GPS manufacturers, they are newcomers. Garmin has been doing this for almost 20 years and knows their market extremely well. Apple’s iPhone GPS is great if you’re walking around, but in a car it’s clumsy and doesn’t offer nearly as many extras as stand-alone GPS systems do. Besides, Garmin is synonymous with GPS. When I ask people if they have a GPS, I don’t say GPS, I say Garmin. It’s subconscious, and it’s possible that I’m just strange, but I’ve heard others do the same. That’s pretty solid brand recognition. And I tell everyone to buy a Garmin, not because I have any incentive to (I don’t own any stock in them), but because they create a fantastic suite of products.

Additionally, I seriously doubt that Apple - or any other non-pure GPS company, will develop an in-dashboard unit for sale with new cars. It might happen eventually, sure, but I think it would be a flop for the first few years, simply because Garmin and TomTom are so deeply entrenched.

Last, but certainly not least, is the fact that Garmin has great operating cash flow, heavy insider ownership (40%), $600 million in cash (a share buyback or dividend is coming, perhaps?) and solid margins. There’s also heavy short-interest in this company which could lead to an impressive short squeeze, as shorts take their newfound gains of today.

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