A GPS Maker to Peruse In-Depth

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

Over the past several years, manufacturers of global positioning systems (GPSs), navigational systems and location-based systems (LBSs) have gained steam as the technologies are now utilized by a wide array of industries. One of the key players in the market is Garmin (NASDAQ: GRMN). Most prominent in the Auto/Mobile market, the company is focused on keeping its product lines updated, as well as expanding into fertile international regions and by end market. The strategy has allowed it to boost margins nicely, a pattern that would be more apparent if not for significant foreign currency losses this year. 

Automobile Agreements

Garmin has inked agreements for personal navigation device (PND) installations with many of the major automakers. Plus, during 2012, it launched an “infotainment” (audio, multi-media and navigation) system for Suzuki Motors to be included in its 2013 vehicle models. This year, Garmin also opened offices in China, Germany, and Japan for the purposes of expanding its auto OEM business overseas. As a result, Garmin’s auto segment is on pace for a return to top-line growth this year after several down years. The pickup in this division provides hope for its largest product category, delivering more than half of total sales. Certainly, income from Auto/Mobile-related offerings is apt to grow significantly this year, despite a lackluster performance in the PND market. 

The driver behind the turnaround in this business has been enhanced R&D investments. Management has consistently spent 10% to 15% of sales on development, and recent step ups in this percentage ought to assist it in maintaining or increasing market share. Of several fellow participants serving the automotive sector, one worth mentioning is Harman International (NYSE: HAR), like Garmin, supplies the likes of Chrysler and BMW primarily with multimedia systems. HAR is continuously aiming to secure long-term deals with OEMs, and along with Garmin is now penetrating China. Harman has a first mover advantage in auto infotainment. Thus, Garmin may find it difficult to make strides. 

Innovation Fueling Growth

Applications such as golfing and dog training have supported strong profit gains in Garmin’s Outdoor segment. The proprietary nature of these items, it seems, is helping to enhance overall gross and operating margins. On that note, though, it has been struggling to gain substantial headway in the Fitness (mostly watches), Marine, and Aviation operations. R&D is an important component, here, too, and management has said that it intends on keeping that cost at an elevated level, while profitability metrics rise. Garmin has posted the aforementioned steady levels of R&D spending and lofty gross profit levels that now top 50%.  

Notable product introductions of late in newly penetrated markets have included those such as running watches and tracking systems for hunters and their sporting dogs. Within the marine business, it operates alongside the likes of Raymarine, a subsidiary of FLIR Systems and additional larger firms. Although it faces a tough environment marked by slow large boat demand, Garmin continues to invest in its marine lineup and make tuck-in acquisitions. The balance sheet is unleveraged and highly liquid with excess cash that is likely to be partially utilized for further such buyouts. Purchases could help it to maintain its 70% share of the U.S. PND market. In Europe, this number is 32%. Noteworthy competitors in auto are TomTom N.V. and MiTAC Digital, while others, namely Lowrance (unit of Navico) and Delorme produce outdoor offerings. In fitness and aviation, as with marine, Garmin is up against numerous much larger entities.    

Summing it Up

It is probable that there is much potential for expansion left in the navigation market and Garmin should remain at the forefront of the trend. It is investing considerably to ensure as such. The fruits of these expenditures may well be realized near term in the auto market and in less saturated product lines where cyclical upturns are occurring. With the shares trading at a reasonable P/E valuation and risks being limited, investors may want to consider GRMN for its long-term appreciation potential.


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