Will The Big Boys Of Tech Make This Company Obsolete?

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

The well-known maker of navigation systems, Garmin (NASDAQ: GRMN), has struggled in recent years.  Investors and analysts have several concerns including lower profit margins due to pricing pressure in the industry and the increasing presence of navigation aids that are included in smartphones. 

What causes me the most concern in regards to Garmin are the navigation apps by Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL), two companies with far deeper pockets than Garmin.  While it is inevitable that the use of Garmin’s products in automobiles will decline over time, there may be a few bright spots for Garmin.  For instance, Garmin expects to have rising sales in Asia for some time, as they expect consumer spending to rise faster than the use of navigation devices declines.  First, let’s examine a little about the company and where they may be headed.

Garmin operates in four segments, the largest of which is the Automotive Products division, which accounts for 58% of the company’s revenues.  This division produces the popular Nuvi line of personal navigation devices (PND’s).  While I believe that this segment will certainly decline over time, the company’s other segments may gain ground and partially or totally offset this decline.

The marine segment produces 8% of revenues, and I believe this division will flourish going forward.  I don’t really care how technologically advanced the navigation app on my iPhone gets; I’m not taking it out on a boat doing 40 miles per hour.  So, think this segment is safe.  Their revenues will be tied to the overall health of the boating industry, which tends to flourish in good economic times when people have the most disposable income.

The fitness segment (11% of revenues) produces GPS products to be used for running, biking, etc, and may lose a bit of ground to smartphones, but should be relatively unscathed.  Garmin’s specialty fitness products are more appealing than keeping your Android phone with you while jogging.  Finally, the aviation segment (10%) isn’t going anywhere.  Aviation is arguably the most practical use for navigation systems, and pretty much every aircraft has a navigation system in it.

Where I 'm concerned, as mentioned before, is that the navigation products from the big boys of tech will simply make Garmin’s PND’s obsolete.  Google Maps Navigation already rivals, if not surpasses, Garmin’s features and capabilities, and it is only in the beta stage.  It offers all of the appealing features of the Nuvis, with additional cool features such as Transit Navigation, which helps to navigate complex public transit systems like New York City’s subways.  I’m an iPhone guy and I want this!

While the Apple Maps app was the subject of major disappointment shortly after the iPhone 5 release, Apple is still a major threat to Garmin because of its ability to innovate.  There is absolutely no telling what the next version of Apple Maps could be capable of doing, much less what it will be able to do in 10 years.  Who knows, a future version may even be able to help you navigate through buildings on foot (accurately). 

Garmin currently trades for about 13 times earnings, which I feel is too much for a company with literally no growth projected.  When Garmin reports earnings on Feb. 20, they are expected to report 2012 earnings of $2.92 per share.  The consensus calls for $2.80 and $2.82 in 2013 and 2014, respectively, so I really think the lack of growth outweighs any positive factors the company has going for it, such as its leading market share and the $1.4 billion of cash on its balance sheet.

While Garmin makes a good product, pays a nice dividend, and does have a few things going for it, I just don’t see people spending money for portable navigation systems when the capability of smartphones is evolving so rapidly.  It’s the same reason people don’t buy beepers anymore. They are fine products for what they do, but why have one when another device does the same thing and a whole lot more.  When the company reports, I want to hear how the company plans to adapt to the changing landscape of their industry.  The earnings numbers themselves are secondary, in my mind.

KWMatt82 owns shares of Apple. 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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