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Thursday, November 02, 2006

Doesn’t Take Much to Take Down High-Flier Garmin

By William Trent, CFA of Stock Market Be

We have been writing for several months that the success Garmin (GRMN) has had in the niche market of navigation devices is now attracting competition just as the market growth is really taking off. Judging by the reaction to their latest earnings report, investors are suddenly taking notice.

Garmin 3Q Profit Up 20 Pct, Stock Down: Financial News - Yahoo! Finance

While revenue rose 62 percent to $408 million from $251.3 million in the year-ago period, it missed analysts’ prediction of $423.4 million.

With most tech companies not posting anywhere near 62% revenue growth, one might think Garmin shares would be bouyed by the news. Instead, the shares plummeted 16%. Which illustrates a funny thing about Wall Street - sometimes it’s better for a company to post 8% growth when the consensus expects 9% than to post 62% when the consensus expects 63%, especially if rising competition results in both slower-than-expected sales and lower-than-expected margins. On the conference call, management had some discouraging words about margin:

Looking next at our margins by the virtue of four segments, our Q3 aviation gross margins declined from 66 to 64% as expected and our aviation operating margins declined 39 to 32% due to larger R&D costs as a percentage of sales. Our third quarter outdoor fitness gross margins declined from 60% to 56% due to unfavorable product mix and lower component costs reductions during the quarter….
Q3 marine gross margins declined from 60% to 53% due to unfavorable product mix and certain price changes as we anticipate new marine prices reduction in the upcoming months.

Our third quarter automobile gross margins remained flat at 42% for the third consecutive quarter beating our expectations….We do however expect that our automobile segment will experience declining operating margins due to reduced pricing and a continued transition toward mass-market level.

Clearly that wasn’t what investors wanted to hear.

The author may hold a position in the securities discussed. The author's current holdings are as follows: Long: Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion's Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; Ceradyne (CRDN); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Lion's Gate (LGF) call options; Dell (DELL) put options; Ceradyne (CRDN) call options; Plantronics (PLT) put options

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