Garmin in a Good Position

The market for portable navigation devices is red-hot. Global positioning system (GPS) devices have been around for years, but only recently have they become affordable, as manufacturers have found more cost-effective ways to produce them.

What's more, the market for GPS devices, which use satellite technology to determine a user's precise location, has plenty of room to grow. Fewer than 10% of cars in North America and Western Europe currently have a navigation system on board. Over the next five years, the $4.5 billion industry should grow to $12 billion, according to CIBC World Markets.

Garmin, the leading producer of GPS-enabled devices in the U.S., is in prime position to capitalize on the upswing in demand, CIBC analyst Yair Reiner wrote in a note to clients. "Garmin is, in our view, an exceptional company-well managed, creative and careful without being risk averse," he wrote. CIBC initiated coverage of Garmin (symbol GRMN) on April 17, with a "sector outperformer" rating and a 12 to 18 month price target of $67. The stock barely budged following the report and closed at $54.19.

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Garmin shares have climbed 26% over the past year. They trade at 19 times the $2.81 per share that analysts, on average, expect the company to earn in 2007 and at 16 times Reiner's 2008 estimate of $3.28 per share.

The company's diverse lineup of GPS-equipped products includes cars, boats, airplanes, mobile phones, and fitness gear, such as heart rate and distance monitors. Many of Garmin's products are sold by big retailers, including Target, Best Buy, Circuit City, and Wal-Mart. The company also maintains agreements to install its products in Enterprise rental cars, Honda motorcycles, and Cessna Aircraft, as well as vehicles made by other companies.

Automotive navigation devices, which account for nearly two-thirds of Garmin's annual sales, helped boost the company's revenues 72% in 2006, to $1.8 billion. During that period, earnings per share increased 64%, to $2.35. In 2007, Garmin expects to see a 41% increase in revenues, to $2.5 billion, and a 15% increase in earnings per share, to $2.70.

Garmin's rivals include Dutch company TomTom, which is the dominant player in Europe, as well as Sony, Sprint, Motorola, and several low-cost providers. Garmin has been fending off the competition by rolling out new products (more than 70 in 2006), equipping its devices with features such as MP3 players and travel guides, and boosting its marketing efforts. Because Garmin manufactures its wares in-house, it's also able to quickly deliver in-demand products. "Over its history, [Garmin] has shown a consistent ability to leverage engineering prowess, core competency in GPS and marketing savvy to target and conquer new high-growth markets," says Reiner.

Price competition is a major concern facing Garmin. But Reiner says previous attempts by low-cost manufacturers to undercut Garmin and TomTom "have been met with limited, fleeting success." Moreover, Garmin has closely coordinated its price decreases with decreases in its production costs. "Consumers have recognized that not all PNDs [personal navigation devices] are the same, and have demonstrated a consistent willingness to pay a premium for well-integrated, user-friendly devices such as those designed by Garmin," he says.