Garmin Points to Strong Future

GPS navigation system provider is poised for strong growth and expansion.
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Who hasn't gotten caught in traffic and lost in a desperate attempt to make it to the showing of a movie based on a video game starring the acting triumvirate of Steven Dorff, Christian Slater and Tara Reid?

Ok, in fairness, that probably has never happened to anyone. But we've all been lost driving somewhere and wished we could have known about traffic jams before we found ourselves trapped.

We used to take it as a matter of fact that there was no way we could acquire the foresight to dodge these problems. But because of Global Positioning System technology, we no longer have to get lost or stuck in traffic.

One company benefiting from the growing base of consumers demanding mobile-connectivity is

Garmin

(GRMN) - Get Report

, a provider of navigation, communication and information devices.

We believe Garmin is taking the right steps to position itself for the future.

More specifically, Garmin designs, develops, and manufactures portable and fixed-mount GPS-enabled products in four major areas: automotive and mobile, outdoor and fitness, marine and aviation. As for specific products, Garmin creates both portable and dash mounted navigation systems for automobiles, cell phones, sea craft and aircraft.

The company also creates on-person units for runners or bicyclists, and as for features, some of the company's units come with radio and Bluetooth technology or provide information like restaurants or movie listings and traffic reports.

Besides its current portfolio of attractive products, we also like Garmin because it has a history of effective management. Looking at the company's financial performance over its sixteen year history, Garmin has exhibited robust revenue and net income growth, while at the same time, it has maintained a healthy balance sheet.

Looking at its most recent fiscal year numbers, Garmin generated $1.77 billion in sales last year. This was a 73% increase from the year before, and sat well above their five-year annual growth rate of 37%. On a geographic basis, the lion's share of these sales came from North America (62%) and Europe (33%), with the remainder coming from Asia (5%).

By segment, growth has stemmed from the company's automotive and mobile segment as this segment has seen sales increase 170% over the past two years, and in 2006, sales from this sector made up 60% of Garmin's total sales. Also in the same time period, Garmin's outdoor and fitness unit grew 20% and made up 16% of sales.

Moving forward, Garmin's management has estimated at least a 20% increase in top-line revenue this year over the last, which they believe will be driven by increased automotive and mobile segment sales. The company believes this segment could still see a 50% sales increase, predominantly driven from the North American region.

Perhaps more impressive than the company's revenue growth story, however, is how efficient Garmin has turned these sales into profits. Garmin completed 2006 with a gross margin just above 50%, and a profit margin of 29%. Additionally, the company holds a minimal amount of debt, which means that interest charges are unlikely to squeeze its bottom line. Instead, the company can use its cash flow to continue its reinvestment into the business -- a policy whose success is reflected in the company's attractive return-on-equity, which has steadily increased over the past three years from 22% to 33%. Likewise, return-on-assets have increased from approximately 18% to 27% over the same period.

As a concern, the company faces significant competition from TomTom, a company based in Europe, which is an area Garmin has focused its attention on. Garmin currently maintains 15% to 20% of that market's share, but to be more competitive they must lower their product's average price. If these lower prices do not result in increased volume, future margin erosion may be in the cards. Fortunately, over the past year the company has, and should continue, to benefit from a lower bill of materials as both LCD and GPS chip sets have come down in price and this effectively decreases the cost to build their products.

However, despite concerns over the possible tightening of margins and the increase of already stiff competition in Europe, we believe international expansion could be an important growth driver for the company in the long run, specifically in its Asia/Pacific region.

Right now this area only contributes a mere 5% of Garmin sales, because household incomes in this region do not justify the purchase of a portable GPS unit, and more importantly, the electronic maps used in Garmin's products do not provide as much detail in Asia as they do for other parts of the world -- like North America or Europe.

But considering how these economies are expanding, we believe Garmin will make the necessary investments to make this region a more significant revenue generator somewhere in the range of three to five years.

What do other investors think of Garmin? Well, analysts are currently forecasting earnings per share for full year 2007 of $2.81, which equates to an 18% increase over 2006, valuing the company at approximately 19.1x forward earnings; far below the 23.9x forward earnings price tag for the industry as a whole.

Why the discount? Perhaps because the market is expecting a greater reduction in profit margins as a result of lower planned product prices aimed to compete with European manufacturers. And certainly if these lower prices are not offset with greater volume, as management hopes, this stock will undoubtedly be affected.

A significant risk, yes -- but beyond this, the company still maintains a healthy balance sheet; it has a history of net income growth, and when all is said and done, we believe Garmin is taking the right steps to position itself for the future -- and we don't even need a GPS system to say so.