Garmin ( GRMN) shares have been pointing in only one direction as the economic impact on the consumer and increased competition have hurt the personal navigation device maker. Those issues, combined with the long-delayed introduction of the company's Nuvifone handset device, should continue to pressure shares over the next few quarters, analysts say. The Cayman Islands-based digital-navigation gadget maker was a favorite among traders in 2007 when its stock surged 80%, but investors have seen a 75% drop in Garmin's stock this year to $24.35 a share, a new 52-week low. The rapid decline comes as economic conditions have worsened worldwide because of the credit crunch in financial markets. Garmin's problems began surfacing months ago during its last earnings statement, when CEO Min Kao said that "the sector is not growing as rapidly as earlier anticipated," as a result of a more cost-conscious consumer. At that time, the company lowered its full-year revenue growth expectations to $3.9 billion and said it expects a profit for the year of $3.86 a share, which excludes a gain from the tender of the Tele Atlas stock. Wall Street is currently expecting Garmin to notch a full-year profit of $3.96 a share on sales of $3.83 billion, according to Thomson Reuters. Garmin is set to report third-quarter earnings Oct. 29. In addition to traditional financial metrics, analysts will be looking closely at both the number of units shipped in the third quarter as well as the average selling price as an indication of how Garmin is handling the slowdown in consumer spending. Garmin predicted earlier this year that prices for personal navigation devices, or PNDs, would drop 25% in 2008.
Although that forecast has held up thus far, RBC Capital Markets analyst Mark Sue estimates that full-year earnings could be hit by 6 cents a share for every percentage point greater than the expected 25% decline in the average selling price of PNDs for the remainder of the year. Perhaps more concerning for Garmin is that the global slowdown that will undoubtedly crimp consumer spending on electronic devices, especially as the important holiday quarter begins. In the past few years, Garmin has shipped more devices in the fourth quarter than in any other quarter during the year. Indeed, the company shipped more devices in the fourth quarter of 2007 than it did in all of 2006. "We have increased concerns about the holiday season and we expect increased competition for Garmin from both other PNDs manufacturers as well as other consumer electronics," RBC's Sue says in a research note. Sue predicts that Garmin's product mix will shift toward the low end as PND prices dip below the $100 level this holiday season. "
It remains to be seen whether consumers will reach for the additional features included in the mid- and high-end products," he adds. In addition to those economic-related troubles, Garmin faces intense competition from rival TomTom and other PND makers, as well as handset makers now featuring GPS technology in their phones. Sue says that while pricing deterioration has not accelerated, rival TomTom has intentions of raising its market share in North America to 30% from its current level at 20%. That means Garmin is in for an aggressive fourth quarter from TomTom.
Analysts were also disappointed by Garmin's announcement that it would postpone the roll-out of its all-in-one Nuvifone handset until the first half of next year. For analysts like Sue, the success of the Nuvifone seems less likely with each passing day. "The handset market moves incredibly quickly and it has now been over nine months since the Nuvifone was first announced and will be at least 15 months before it is available," Sue says. "Battery life and call reliability remain the hurdles in getting the product to market, but we are concerned about the limited market size for navigation-centric smartphones and that the competition may have erased any lead that Garmin had." For instance, Nokia ( NOK), which acquired digital mapmaker Navteq earlier this year for $8.1 billion, should offer strong competition to a Nuvifone once it integrates the technology, while Apple's ( AAPL) iPhone 3G and the new G1 handset with Google's ( GOOG) Android operating system already provide navigation help. Of course, handset makers have run into their own problems as well, and that doesn't bode well for Garmin. Sony Ericsson, the joint venture between Sony ( SNE) and Ericsson ( ERIC), has said that challenging market conditions "are expected to prevail for at least the rest of 2008, and in particular for the third quarter." Motorola ( MOT) has also reporter soft sales of its handsets. "While not directly applicable, we believe there is some correlation with PND devices," writes JB Groh, analyst with D.A. Davidson, in a research note. "Additionally, weak economic data suggests to us that the consumer will be thriftier during the important holiday season."