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Garmin Gets Lost


GPS maker falls short of estimates.

To say that global positioning gadget maker Garmin (GRMN) had a bad day would be an understatement. In fact, it had a downright awful day as its stock got pounded, losing more than 20% of its value. The reason: It reported a lower-than-expected second quarter profit and management lowered the earnings bar for 2008.

Digging in a bit deeper, the Cayman Islands based company earned roughly $256.1 million or $1.19 a share in the period, which for those keeping track was well north of the $214.4 million or 98 cents a share it earned in the comparable period last year. However, per the Associated Press, "not including the effects of favorable foreign exchange rates and a $66 million gain on the tender of the company's Tele Atlas NV shares, the company would have earned 93 cents per share in the second quarter." Analysts had been expecting the company to earn $1.

Adding fuel to the fire, Garmin now expects 08' earnings will come in at $4.13 a share and that it will generate revenue of $3.9 billion. That's well below a previous 08' outlook where it was looking to generate EPS in excess of $4.40 per share and revenue in excess of $4.5 billion.

And finally, according to the AP, "Garmin also said its GPS-capable nuvifone mobile phone device will not launch in the fourth quarter as previously expected, due to challenges in meeting some carriers' specific requirements. Instead, the company plans to launch the product during the first half of 2009."

With all of that in mind folks, here are some of my thoughts on the Garmin story:

The first thing that concerns me is that although its sales line rose some 22.8% (from roughly $742.5 million to $911.7 million), analysts were expecting the number to come in much higher – right around $955 or $956 million or so. And that means two things to me. First, this isn't some minor cost cutting issue, it's ultimately an issue of getting dealers (and down the food chain, individuals) to buy its gadgets. Very simply, I think that the company is seriously going to have to find a way to drive that top line if its going to get back in the investment community's good graces.

Second, how do you think the analyst community is going to react? I suspect we could see estimates, and/or ratings coming down in the days ahead. In fact, perhaps it's already incurring somewhat of the analyst's wrath. Per Yahoo Finance, DA Davidson lowered its rating on the stock (on the 30th) from "Buy" to "Neutral."

Also, how do we know that management set the bar low enough at this point? Seriously, that concerns me. I mean think about it, the competition is stiff, and some electronics retailers ala Circuit City (CC) are feeling a pinch. Plus it was only February when it offered up the 08' forecast mentioned above, and look how much things have changed since that time! I don't know but I am taking this new forecast with a grain of salt.

Finally, when I saw yesterday's action my mind automatically drifted to the topic of tax loss selling. Why? Folks, take a gander at this chart, and as you can see the shares are right around 70% or so off their 52-week high. My point is that I think that later in the year, if the stock continues to languish, that a sizable amount of existing shareholders could bite the bullet and book a tax loss, and possibly driving the stock price down further.

Garmin closed at $35.19, down $9.87 or 21.9%. The shares were up slightly in after hours trading.
No positions in stocks mentioned.

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