TomTom's Shrinking Margins Drag Down Garmin

Garmin (GRMN Quote - Cramer on GRMN - Stock Picks) shares fell anew Thursday as rival TomTom raised fresh concerns about shrinking margins, the result of fierce pricing competition between the two personal navigation device makers.

TomTom, which trades on the Euronext stock market, lost significant ground after the Dutch company said gross margins declined in the fiscal third quarter as the average selling price of the company's navigation products slid more than 23%.

The diminishing margins echo warnings Garmin Chief Financial Officer Kevin Rauckman made during the company's fourth-quarter conference call a day ago. Rauckman said that competitive pricing will pressure its automotive and mobile segment going forward, and that Garmin "will experience an [average selling price] decline of approximately 20%, which will cause ... gross and operating margin compression during the year."

Shares of Garmin were lately down $1.39, or 2.2%, to $63.08, bringing its two-day slide to 9%.

On Wednesday, the Cayman Islands-based digital navigation device maker posted a profit of $1.31 a share, excluding items, handily beating the Thomson Financial average estimate by 20 cents, but the stock pulled back after the company said this year "will present increased challenges from competitors."

Following Garmin's conference call, Robert W. Baird analyst Reik Read upgraded Garmin to outperform from neutral, citing an attractive share price. However, Read reduced his stock price target to $79 from $94.

Similarly, Lehman Brothers analyst Noelle Swatland cut her price target for Garmin to $89 from $115, although she maintained an equal-weight rating on the stock and upped her 2008 and 2009 profit forecasts.

Both Garmin and TomTom may now have to mull acquisitions to stem narrowing margins. On Wednesday's conference call, Garmin President and Chief Operating Officer Cliff Pemble said the company will "maintain our focus on new acquisition opportunities" in order to maintain growth.

A series of deals has been reached in recent months that is already reshaping the industry. Garmin has extended its agreement with digital mapmaker Navteq (NVT Quote - Cramer on NVT - Stock Picks), which is being acquired by Nokia (NOK Quote - Cramer on NOK - Stock Picks), while TomTom beat out Garmin's bid to purchase mapping-data company Tele Atlas.