Garmin (GRMN) Is A Short

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Be sure to check out our detailed stock analysis (click here). I believe the Garmin (NASDAQ: GRMN) growth story is over. The digital mapping company has turned to self-preservation. It still manages to attract investors with with a 5% dividend yield -- but how long can they keep it up? Its market share is dwindling, it is "expensive" by valuation standards, its earnings are expected to shrink and its dividend payout is questionable.  

Garmin shares tumbled 10% earlier this month after offering weak guidance to investors. The company now expects to see 2013 EPS in the range of $2.30 to $2.40, whereas analysts were hoping for $2.83. Even with this big fall in the stock's price it still remains overvalued. Compared to industry comps, including Trimble Navigation and Cubic, Garmin is above the industry on a number of valuation multiples. 

EV to EBITDA 

  • Garmin 9.3x
  • Industry Average 6.1x 

Price to Operating Cash Flow

  • Garmin 12.5x 
  • Industry Average 10.1x

Here's how Wall Street expects future EPS to come in, notice the contraction I mentioned.

  • 2012 EPS $2.85A
  • 2013 EPS $2.56E
  • 2014 EPS $2.62E

This expected dwindling of earnings will put its dividend payout ratio, the percent of earnings its paying out in the form of dividends, to 70%. This relatively high payout ratio will strain the company's ability to continue spending on research and development and marketing, which have been keys to the company's past success -- R&D for finding and developing new products and marketing for sales. This in turn will pressure Garmin's ability to grow and bring up issues of a possible dividend cut. The company has already seen a string of dividend cuts the last few years...

Who's to blame for the GPS decline? 

The big culprit of the GPS market decline has been a rise in smartphone usage. This has led to cannibalization of the GPS market and will only further wreak havoc on the industry. The global smartphone market will continue to see robust growth, expected to grow 22.5% in 2013, driven by the emerging markets of India, Indonesia and China, which precisely is where Garmin hopes to expand. I believe that smartphones will beat Garmin's GPS devices to these markets and only further hamper the Garmin's growth  (read more about who Garmin's taking a back seat to).

The major smartphone makers include Apple (NASDAQ: AAPL), Google (NASDAQ:GOOG) and Nokia (NYSE: NOK)Google’s Android OS is the undisputed leader...

Mobile Operating System Market Share (4Q 2012, source: Gartner)

  1. Android: 70%

  2. iOS: 21%

  3. Blackberry: 4%

Google appears to have a strong hold on Garmin's navigation market, thanks in part to its Google Maps application. There was also much excitement when Apple's iOS decided to bring Google Maps back as its default map app. Nokia also made recent announcements concerning its plans to make a trio of map and navigation apps across all its Windows Phone 8 devices. Smartphones are becoming an increasing part of everyday life, and this includes their presence in the car. MirrorLink hopes to offers seamless connectivity between a smartphone and a vehicle's entertainment system, which streamlines the replacement of navigation devices with smartphones. 

How is smart money trading Garmin? 

The level of insider sales have well outpaced that of buys at Garmin, with the most recent buy being as far back as 2009, while a number of insiders sold throughout the second half of 2012 (see insider trading here). As far as the hedge fund activity, billionaires Ken Griffin of Citadel Advisors and Jim Simons of RenTech sold off their entire stakes of Garmin during the fourth quarter (check out all hedge fund activity).

Don’t be fooled

Smartphone adoption has been growing rapidly; too fast for Garmin to hedge the devices' infringement on its GPS market. Garmin even tried launching a mobile phone of its own, but it failed to catch hold in the market. I think Garmin's business model is in jeopardy. Even trying to branch off to into watches and other sport-specific gadgets has failed. It now has a PEG ratio 2.8, which is way too high (anything above a 2.0 is expensive) for a worthwhile investment.