This Company Needs to Innovate to Thrive

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Garmin (NASDAQ: GRMN) is still a major player in personal navigation devices, but its grip on the market is fading. Larger players like Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL) offer more convenient options thanks to the increased popularity of smartphones. However, only one of these technological behemoths has delivered on their maps. We’ll get to that soon.

Garmin has seen growth in some other areas, but that growth isn’t going to be enough to compensate for the market share lost in personal navigation devices. There’s only one way Garmin will be able to thrive in the future, which I’ll tell you soon. And even if Garmin isn’t capable of thriving, the long-term potential for the company isn’t necessarily bad.

Getting lost

Garmin’s revenue declined in 2012 and earnings have been inconsistent. However, Garmin consistently delivers profits, and over the past five years, diluted earnings have ranged from $2.67 to $3.50 per share. Combine this with over $1.20 billion in cash and no long-term debt, and dividend investors have nothing to worry about.

If you’re looking for growth and a thriving company, then you’re probably (not definitely) going to be disappointed. Management already announced that it expects a 20% decline in revenue this year, citing the popularity of smartphones as the primary catalyst for the company’s revenue decline.

Google Maps is extremely popular, and it’s looked at as the go-to source for directions. Apple, on the other hand, has failed in this area. CNN ranked Apple Maps as one of the Top 10 fails of 2012. Apple probably wishes it could go back to that fateful day of June 11, 2012, when it announced that its maps would no longer be powered by Google Maps. The concept made sense. Why help your competitor? But the last thing you want to do is aggravate your customers to a point where they lose trust in your business.

Apple Maps relied on TomTom and AutoNavi to provide accurate data, but it led to misidentified locations and miscalculated distances. You could type in that you wanted to go to a hospital 10 miles away, and you might have ended up at a hot dog stand around the corner. It even got to a point where people wouldn’t use Apple Maps just for navigation, but for humorous entertainment as well. Apple Maps also failed to offer street views or transit directions. Apple CEO Tim Cook apologized for the mishap, and Apple Maps is constantly being improved.

For all you Apple longs out there, this isn’t a bearish case for Apple. It’s one failure out of many great successes for a very well-run and cash-rich company that is fundamentally unparalleled.

Garmin runs away from home

Garmin had relied on strong sales growth for its personal navigation devices for many years. With the industry changing, Garmin knows it must look to other revenue streams to help support the top line. Aviation and Marine have been the two top performers as of late, both seeing revenue increases last quarter sequentially. The problem is that Aviation only represents 15% of revenue, and Marine represents just 9% of revenue. Comparatively, Auto/Mobile represents 47% of revenue, and the word 'growth' has become foreign for that segment.

Garmin is focusing more on high-margin products, but that’s still not going to be enough to offset the slide in personal navigation devices. Garmin might have potential overseas, but it’s only a matter of time before industry trends catch up in those markets as well.

Garmin only has two chances for future growth. One, it somehow recaptures a stronghold in personal navigation devices (not likely.) Two, it relies on technological innovation to produce a product that blows the market away. This could be in any area that the company operates, or better yet, it could be in a new area, which would take the market by surprise, generate excitement, and drive the stock price higher.

Playing it safe

If you’re considering an investment in Google or Apple, opposed to Garmin, because you want to play it safe, then you might want to take a look at this stock price chart first:

GRMN data by YCharts

As you can see, playing it safe with Apple has been dangerous. That's because it has been nearly impossible for Apple to keep up with its high expectations. Eventually, Apple will become a bargain, especially with one particular product that’s set to be released next year, but that’s a story for another time.

Google has hit many home runs, including Android, Google Search, Google Chrome, and yes, Google Maps. When Apple ruled Wall Street, Google quietly offered steady gains. Once investors began questioning Apple as an investment, many of those investors changed teams and sided with Google.

Currently, Google is trading at 26 times earnings, whereas Apple is trading at just 10 times earnings. Apple offers slightly better margins, and a yield of 3.10% versus no yield at all. However, investors want to go with momentum  and future potential. Google is now so diversified that growth is bound to come from somewhere. Apple is also diversified, but its entire universe is more connected. 

If you don’t want to play it safe, then take a look at Garmin. The good news is that the stock is only trading at 13 times earnings, margins are strong, and the yield currently sits at an impressive 5%. The bad news is that growth is slowing in what was once Garmin’s most reliable area.

Conclusion

Garmin’s near-term prospects aren’t good, but Garmin has a ton of cash, which will buy time and give the company an opportunity to come out with something that surprises the market. In the meantime, Garmin’s fiscally sound position will allow it to continue to return capital to shareholders, making it more of a dividend play than a growth play.

If you’re looking for broad product diversification, consider Google. If you’re looking for value, consider Apple.  

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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