In The GPS Space, Business Wins
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Global positioning companies (GPS) Garmin (NASDAQ: GRMN) and Trimble (NASDAQ: TRMB) have both seen their shares come under pressure this year. However, one is much better positioned than the other to succeed over the long term.
All the Rage
GPS systems receive signals from a collection of satellites and then triangulate the exact location of the receiving device. Through the wonders of modern technology that allows all sorts of good things to happen, from on the go directions to self steering farming equipment.
When the technology hit the consumer market it was an overnight success and Garmin was the clear leader. In five years, the company's sales ballooned from around $500 million to nearly $3.5 billion. That 2008 peak, however, remains the high water mark.
Lack of demand isn't Garmin's problem. The problem is that GPS systems are being integrated into more and more devices. Why buy a separate GPS unit when you can just use your iPhone's built in system? The company has found some traction in niche markets, such as GPS gear for sports enthusiasts, but that hasn't pushed the top line back into growth mode. Car based GPS devices still make up around half of the company's business.
On that front, Garmin is working to get into the dashboard instead of being placed on top of it as a secondary purchase. That's a good move, but it puts Garmin into a highly competitive industry space. Garmin has been returning value to shareholders via dividends and share repurchases, but what it really needs is to push sales higher again.
Garmin's around 5% dividend yield might interest aggressive income investors and those seeking a turnaround. However, without a clear catalyst in sight that's a high-risk wager. That said, with no debt on the balance sheet, Garmin has time to jump start its business again.
B to B
Although its sales aren't as large, Trimble seems to have found a very profitable and growing niche for GPS technology. The company sells a collection of services and devices that allow businesses to use GPS to improve their operations. Key markets include agriculture, construction, engineering, and defense, among others.
Its products go well beyond simply putting a pin on a map and providing directions from point A to point B. For example, Trimble sells the systems that automatically steer farmers' vehicles. Its products allow businesses to run more efficiently, safely, and produce more accurate outcomes. Those are big benefits that customers are gladly willing to pay for.
Trimble's top line grew from a little over $500 million in 2003 to $1.3 billion in 2008. Not as impressive of a top-line advance as Garmin. However, after dipping during the 2007 to 2009 recession, sales started to grow again. The top line was over $2 billion last year. Unlike Garmin, Trimble has solid growth prospects despite the recent share price pullback.
Although Trimble shares are still trading near all-time highs, growth investors should view the pullback as a potential buying opportunity in a GPS specialist with a growing business.
Better in Business
The benefit of operating in the business space is what separates these two companies and why investors should prefer Trimble over the long term. That's true even though Garmin's top line is larger, since that fact doesn't always translate into a better business.
A good example is Facebook (NASDAQ: FB), which serves the retail market, like Garmin. It pulled in $5 billion in revenues in 2012, but only managed to eek out a penny a share in earnings. LinkedIn (NYSE: LNKD), which caters to business customers, posted sales of just under $1 billion in 2012, but earned nearly $0.20 a share.
The big difference between the two companies is that LinkedIn has been able to sell products and services to its business focused customers while Facebook still hasn't managed to tap its massive customer base.
Of the two LinkedIn has a better business and is likely to see continued growth, but investors should stay away until the P/E multiple drops into the low double digits from the over 400 it trades at today. Indeed, LinkedIn shares are still trading at unrealistic heights despite having pulled back from the $200 level.
Facebook, which has a similarly ridiculous P/E because of its tiny earnings, probably has more upside potential for aggressive investors who think it can figure out a way to make more off of its customers.
Buy the Business GPS
If you have been watching Garmin and thinking that it has potential because GPS is such a useful tool, take a look at Trimble. The business focused company has integrated GPS to such a degree that customers are happy to pay for its products and services. Garmin hasn't managed that trick nearly as well.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. 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!