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Friday, July 14, 2006

Garmin’s Tricky Navigation

By William Trent, CFA of Stock Market Beat

Normally by the time the big newswires pick up on a business story it has already run its course. Thus, we were surprised to see this mildly bearish take (in line with our own) on Garmin (GRMN) while the stock is still near its highs. The contrarian in us now wonders whether the story has more legs.
Garmin Tries to Navigate Mass Market: Financial News - Yahoo! Finance

As Garmin continues to move its products — and particularly its fast-growing line of automotive-GPS devices — into discount retailers like Wal-Mart Stores Inc. and Target Corp., prices will drop. The growing concern on Wall Street is that the retailing move will weaken Garmin’s profit margins.

“If Garmin chooses to cut prices, growth expectations may be met, but profitability is likely to suffer,” Bear Stearns analyst Peter Barry said. “If, on the other hand, Garmin sticks to their premium-pricing model, it is likely that its market share will erode.”

The GPS market, as analyst Barry noted, has swollen by 23 percent annually, totaling an estimated $23 billion in 2005. The car systems are thought to account for about one-third of the market.No surprise, then, that Garmin’s automotive division has become its star unit. In the latest quarter, its revenue soared 252 percent to $150.7 million. This year, Garmin expects to sell twice as many personal navigation devices as a year ago, and growth in the automotive division is seen reaching at least 75 percent.

Despite these encouraging statistics, some analysts worry how Garmin will fare as the auto market — now the source of nearly 50 percent of its revenue — becomes even more crowded. Garmin dominates with roughly one-half of the North American market, but faces challenges from a slew of overseas rivals, including TomTom NV of the Netherlands.

Of course, with TomTom’s recent stumble, it will be easier for Garmin to sustain its position.

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