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GPS Round-Up: So Far So Good

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Both SIRF Tech. and Navteq have shown decent progress after a very rough patch. Tomorrow we'll hear from big dog Garmin.

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So far the Global Positioning Sytems players have had a good earnings season. Both SIRF Tech. (SIRF) and Navteq (NVT) have shown decent progress after a very rough patch. Tomorrow we'll hear from big dog Garmin (GRMN).

While it may be tempting to sound the all-clear, and I'd like to because I am very intrigued by the secular growth aspects of this group, I'm not sure that the major dangers have passed. In fact, the dangers may have just shifted around.

The source of SIRF's good showing can be found in two words: TomTom (TOM.LN). The European maker of Personal Navigation Devices (PND) got out of its production funk and provided a nice windfall of pent-up orders to SIRF, and since TOM has quite a bit of catching up to do, there may be another couple of months of excess demand coming SIRF's way. But the darkside of SIRF's report is that it read like a multiple page warning of the coming step-down in retail prices for PND's, and how the major rollout of GPS enabled phones beginning in 1Q of '07 will result in SIRF's product mix to shift heavily toward much lower priced chipsets. SIRF's management was turning blue in the face as it repeated that gross margins would not suffer, and that its cost structure was modeled to adjust to lower prices. There's little doubt that SIRF has a great demand cycle coming its way, but demand with poor pricing and falling gross margins is exactly what can eviscerate a growth stock. Note also that some Asian OEM's (where SIRF sells most of its products) have been rumored to be upset at SIRF's prices and to have contracted for cheaper and more mundane chipsets. Whether this type of competition is factored into SIRF's prospects remains to be seen. Perhaps SIRF will smoothly navigate this transition, but the "right" entry price may be as important as ever to manage risk.

What causes heartburn to SIRF may be exactly what NVT needs. You may recall that last quarter management was rather somber about demand prospects until PND's and car based systems would came down to a lower price point and became accessible to a new set of purchasers. NVT's wishes may have been answered earlier than it feared. How much traders/investors are willing to pay for NVT's on-again off-again 20% growth will likely dictate how high the stock can go. I'd rather own it a lot closer to $30 than to $35, but the chart looks appetizing right here, right now.

This leaves us with GRMN. The valuation gives it the least room to disappoint. Last quarter people grudgingly got over the lower margin/lower ASP's concerns and – after an initial scare – bought into GRMN's major increase in guidance. My sense is that the Street is resigned to even lower margins and ASP's in the future (especially with TOM attempting a comeback after the disastrous start to its life as a public company) but where is another jump in guidance going to come from? My trading excursion in GRMN is done and I'll be watching with interest from the sidelines.
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No positions in stocks mentioned.
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