Can Garmin navigate its way back into favor?
Posted
Nov 08 2007, 11:01 AM
by
Robert Walberg
Is Garmin lost? Based on the fact that the stock price has been heading due south for the past few weeks -- to the tune of about 28% -- it would appear that the answer to that question is yes. However, before you steer clear of the country's leading provider of in-car and handheld navigational devices you might want to dig a little deeper into the rationale behind the recent decline.
First and foremost, Garmin now finds itself in a bidding war with its European rival TomTom for Tele Atlas, which provides map data for portable navigational devices. Just yesterday, TomTom upped its original offer for Tele Atlas to about $4.3 billion, eclipsing Garmin's surprise offer by a handsome 22%. Garmin must now either cough up over $5 bln for Tele Atlas within the next few days, or see another top mapping company fall into the hands of a competitor. Nokia acquired Navteq earlier this year for more than $8 billion.
Obviously, if the company ends up paying more for its hostile run at Tele Atlas it would depress the price of the stock further as investors will question how much the purchase willl dilute future earnings growth. There's also the problem of integration should Garmin navigate its way to victory, as the company currently relies primarily on Navteq for its mapping data. The switch to Tele Atlas would not only take time, but the execution risk is very high. I think this is what is meant by the phrase "winning ugly." If Garmin decides to raise its bid and wins the battle to acquire Tele Atlas, shareholders might be in for a lot more ugly over the next year.
However, what happens if Garmin takes a pass? The initial reaction on Wall Street is likely to be one of disappointment, as there is a general feeling among analysts that the company needs to own one of the mapping companies. I disagree. Garmin is doing just fine selling its hardware, as earnings have grown by an average of 31% over the past five years, and they are expected to grow by an average of 20% per year over the next five. In addition, it's not as if Garmin will be unable to acquire mapping data from Navteq going forward as Nokia has indicated that it will run the company as a stand alone entity. Finally, for the price they might have to pay to acquire Tele Atlas the company could begin to build its own mapping business -- it would take time and money but with new technologies the end result could be a superior product.
There's simply no reason to overpay out of desperation just because a handful of Wall Street wizards say you have to own mapping or be lost for good. The reality is that more and more auto companies are making navigational devices standard in newer model cars and trucks. Handheld units continue to fly off the shelves now that the price point has come down to under $300.
Garmin might take another short-term hit if it loses its bid for Tele Atlas, but this is one instance in which losing the battle does not mean losing the war. Investors should use any additional short-term weakness to build long positions in the stock of this fast growing, undervalued company. Based on a multiple of 30 times estimated fiscal year 2008 earnings of $4.25 per share, the stock has upside to the $127 area.
(Full disclosure: Neither I nor any immediate family members own the stock, but clients do own some.)
