The Smartphone Didn’t Kill This Company

By Steven Heller - September 20, 2012 | Tickers: AAPL, GRMN, GOOG, HON, NOK | 0 Comments

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The smartphone merged many functions into one package, which has forced many standalone products into obsolescence.  It’s brought death to your GPS, music player, address book, portable gaming device, and then some.  How did GPS giant Garmin (NASDAQ: GRMN) manage to survive the carnage that smartphones brought onto so many industries?  You would think they would’ve been left to the wayside.  And in many ways, they have.  Shares are down 60% from their peak in 2007, but business is showing signs of recovery.  Let’s see if Garmin has enough of a future for a second act. 

The Business
There is more to Garmin than meets the eye.  When you look at the whole picture, they have a diversified business, split into five different lines.  Here’s how they all preformed last quarter:

 
Garmin executed their business as expected and anticipated the decline in Marine sales.  They fully expect the market to remain difficult through the end of the year.  Longer term, they are focused on marine opportunities that have developed from offering a broad range products for OEMs and the aftermarket.         

On the brighter side, the performing divisions have offset the macroeconomic headwinds faced by nonperforming businesses.  And as a result, they’ve raised full-year earnings guidance.    

The Mobile Competition
It would be an understatement to say Garmin has many competitors because each division has a different set.  Looking specifically at their biggest business, personal navigation devices (PND), mobile smartphones are the most immediate threat.  That makes Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) public enemies one and two. 

With the introduction of iOS 6, Apple will be integrating a homegrown turn-by-turn application.  This feature has been available on Google’s platform since version Android 2.0.  Between the two, it’s a safe bet that the nail-in-the-coffin for turn-by-turn applications has arrived.  This isn’t ideal for Garmin because this business makes up over half of their total revenue.      

Public enemy number three goes to Nokia (NYSE: NOK).  But this enemy is more like a frenemy.  Without them, Garmin wouldn’t have access to essential map data and live traffic feeds.  That’s because Nokia owns NAVTEQ, a leading provider of digital maps and live traffic data.  In this case, Garmin is both a licensee and competitor, making for an interesting competitive dynamic.            

Thinking Long-term
Garmin is fully aware that smartphones are slowly killing the PND industry.  In light of this, they believe PND’s have become mature and demand will decline by 10-15% this year.  Given these dynamics, their goal is to gain a greater share of a shrinking pie.  If they prove successful with this initiative, profit margins should improve longer term.

The end game is diversification away from PNDs by growing divisions that smartphones have less influence over.  The larger Garmin can grow these other businesses, the better off they will be long-term.  And that’s exactly what they’ve been doing in aviation and fitness. 

In aviation, they recently won a contract to supply avionic systems for upcoming LearJets.  This is a huge win for the brand because Garmin managed to effectively compete against avionics giant Honeywell (NYSE: HON).  If Garmin’s system performs as expected, it could mean a brighter future in avionic systems.         

In fitness, they are expanding their offerings by introducing new products to more effectively compete with Nike.  Last quarter they released a watch specifically designed for swim training, marking their first entry into the market.  The reception has been encouraging and it shows Garmin’s willingness to create niche products.              

Risks and Warning Signs

1. PND market declines faster than 10-15% yearly expectation.
    
2. Failure to execute business strategy to gain market share in declining PND market.  
    
3. More automobiles begin offering in-dash GPS systems as a standard feature.
4. Asian demand continues to deteriorate.  As a point of reference, revenue in Asia last quarter slumped 9% from the same period last year.    
5. NAVTEQ decides to raise royalty rates on data feeds before their agreement expires in 2017.  This would be problematic because there are very few suppliers to replace this provider.        
6. Co-founder and CEO Min Kao begins unloading a significant portion of his 26+ million shares.  The same goes for co-founder Gary Burrell selling a sizeable chunk of his 28+ million shares.    
7. The US Department of Defense begins to charge to access GPS signals.  In an age where future austerity is more than likely, it’s conceivable for the US government to begin monetizing public access services. 

Bottom Line
Borrowing a page from fellow Fool Dan Caplinger and his Perfect Stock series, Garmin is 80% perfect.  The two metrics where Garmin failed are related to revenue growth, which shouldn’t be taken lightly.  Still, Garmin has remained resilient in the face of adversity and defined itself as a great brand with a bit of staying power.  Management has a long-term plan in place of how they want their business to grow.  It may not be so easy to avoid the smartphone’s death grip, but so far they’ve managed to live another day.  In the end, it may not be the most exciting stock in the world, but it’s certainly not the one to avoid at all costs. 

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