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Monday, September 11, 2006

Navigating the Market

By William Trent, CFA of Stock Market Beat

When we last commented on Garmin (GRMN) we felt that potential market share losses, coupled with a consumer that seems to be getting tired, made it tough to justify the lofty price. Paul Kedrosky points out another potential concern:

So, is there a killer app for auto telematics? Short of broadband streaming (which would kill Sirius/XM/etc.), I’m increasingly convinced it’s realtime traffic — which makes Dash and Clear Channel Traffic Network (now used by BMW), among others, interesting stories. The fun thing is that many people I talk to think TomTom, Garmin, etc., have this nav market locked up; but it seems increasingly clear that the nav-centric incumbents don’t have as much as auto leverage as they (and their fans) think they do.

We share the opinion that navigation needs to be coupled with real-time traffic in order to be truly useful. However, it is not necessarily a deal-breaker for Garmin or the other leaders, as this Christian Science Monitor article points out:

As for navigating traffic, Magellan’s Roadmate has a feature that provides alternate driving directions via a color touch screen. The most recent Roadmate model also plays MP3s, has a photo viewer, and speaks driving directions. A suction cup keeps the 5-by-4 inch device in place on the windshield. The price ranges from $600 to $800 depending on the model, and excluding subscription fees. TomTom and Garmin offer similar products, with virtually identical prices.

Perhaps the greatest advantage of these devices is that they work in almost every major city across the country. That’s because, in the past five years, brands including Magellan, TomTom, and Garmin have partnered with major broadcasters to buy FM feeds that enable their devices to pick up traffic reports virtually anywhere. Coupled with technological improvements in mapping, these products are a lot more affordable than they were several years ago, says Brant Clark, a senior product planner at Magellan, the consumer brand of Thales Navigation in San Dimas, Calif.

This isn’t truly real-time traffic data, however. Although there is only a modest delay between the time the radio information is received and then re-broadcast to the navigator, any frequent commuter can tell you the larger delay is between the time the traffic forms and the radio stations learn of it. Still, any systems developed that would provide more timely data would likely be licensed to all of the navigation system makers in order to reach the broadest possible adoption.

Whether that justifies an enterprise value of more than 40x free cash flow is another story.

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