The Street is pricing in a solid earnings report for Q2 and positive color on forward guidance. The bull story with Garmin is the sustainability of its gross margins, specifically as relates to its PND segment. There is no question that the automotive market for PND is highly under-penetrated and represents a tremendous growth opportunity.
However, there is a sense of conviction floating around that Garmin can be the Apple of the GPS market,and will not compete on price but on brand equity and core functionality around its product, in other words, that its gross margins are likely to be immune from price cutting carried out by its competitors. How true that conviction is will hopefully come to light when the Company announces results for Q2.
I am of the opinion that the proliferation of low end GPS devices that carry the same core functionality as those of the low to mid end Garmin product line will cause the Company to lower prices in order to drive incremental unit sales. Also, there will be a shift in Garmin’s product mix as more sales will be driven off lower priced products such as the Nuvi 200, retailing around $275 on Amazon.
Additionally, we have seen a rebound in NAND flash pricing as well as an uptick in LCD panel pricing, both of which were in free fall until a few months ago, which provided the much needed cushion for Garmin to maintain its margins. The stock has had a solid run over the last few months and is off a mere 2.3% from its all-time high reached on July 26, 2007.
Obviously, the Street has priced Garmin to perfection and I am pretty certain that there is money to be made on the short side of the trade. Note that my call here is purely short-term in nature and I am not even going to consider the longer term threat of in-dash systems and the more timely threat of GPS service being offered by wireless devices such as cell-phones.
Additionally, I just cannot help but ponder about the valuation gap that exists between TomTom and Garmin. TomTom which is a pure-play on the PND market trades at 10.6x 2007 consensus EBITDA and 9.2x 2008 consensus EBITDA. Garmin in contrast trades at 23.6x and 20.8x current street consensus EBITDA respectively. Granted that Garmin has a more diversified portfolio comprised of auto, marine, aviation and outdoor fitness compared with TomTom which is purely focused on the automotive market. Granted also that Garmin has been more aggressive with its R&D and IP protection than TomTom has been, but such a huge valuation gap cannot be justified in my mind.
Let us not forget that TomTom is the clear leader in the global GPS market with a top presence in Europe. I am a big fan of Garmin management and greatly believe that they been nothing short of phenomenal over the last couple of years. My opinion here is not reflective in any way of management’s quality and its ability to execute according to plan but more on Wall Street getting ahead of itself. My thesis may be completely off, and Garmin may end up providing stellar guidance around gross margins and unit growth for the remainder of 2007 which might propel the stock to stratospheric levels.
However, if I were to be a speculating individual, who I am, I would be more inclined to go long TomTom at current levels and short Garmin into the second half of 2007.
Disclosure: none
