Cramer’s Bottom Line on Garmin

“One of the charts I use, professional sellers are tearing this stock to pieces. And there really isn’t any sign of large scale institutional buying. Garmin was rallying nicely ever since July, okay? Then it hit a brick wall. During the week of October 30, it fell 20% after Google said it would offer GPS services in its Android smart phones…

Here’s the bottom line on something like this: Garmin’s business may be able to hold out for a while in the near term, but the big money is betting against it, and the long-term story, which is unacceptable to me. You don’t buy a stock on life support when you know it’s in terminal condition ultimately. Why buy this company that sells a commodity product when so many proprietary technologies with faster growth or higher dividends are out there? I’m saying that Garmin is a sell, sell, sell.” — CNBC’s Mad Money 2/11/2010

Garmin Ltd. (GRMN) is a stock that on paper is a value investors dream; pristine balance sheet, sells for 10.7x TTM earnings, with a yield of almost 2.5%. However, there is a real problem with Garmin’s business model as a leader in the field of GPS technology, which has increasingly become available for free as a feature on hugely popular smart phones. For a company that is so reliant on this increasingly commoditized technology, this situation presents a serious threat to future growth.

Over the last year or more, Cramer has been outspoken about one of his favorite investment themes: the mobile Internet tsunami, which he claims will rival the personal computer for its transformational influence on technology stocks. He compares Garmin’s personal navigation devices to the PDA devices that were popular just a few years ago. The smart phone has completely cannibalized that market, as phones can handle contacts and calendars at least as well as a PDA ever did. Why carry two devices when one will do the job? These days he thinks GPS will follow the same fate, as they are similar in their utilitarian nature to PDA’s, as opposed to digital cameras and MP3 players which are used more for leisure activities.

The good news is that so much of the pessimism of this situation has been priced into Garmin’s stock price. Strictly looking at the numbers Garmin remains attractive, as current price-to-cash earnings is 9.6x or just below the historically normal range of 9.7x to 24.3x. Furthermore, price-to-sales per share is only 2.2x which compares favorably to the historical range of 2.9x to 6.9x. Of course the higher end of this range comes from the period of 2005 to 2007 where the company was growing earnings by an amazing 52% to 64% annually, and we cannot envision any situation where the stock receives that kind of valuation. These valuation ranges become significantly more attractive if you were to take out the company’s $9 per share in cash on hand, but those historical valuation ranges include cash on hand so it is more instructive to leave it as is. The huge cash pile will give Garmin some amount of flexibility in the coming years, and that is not to be dismissed.

Our methodology is value-oriented and our most important factors come from the fundamental strength of the stock, which is plainly obvious from looking at our overwhelmingly positive historical valuation chart. However, we agree with Cramer that the long term prospects for the business model are distressing, and this could be the dreaded value trap. At the very least, it appears Garmin will need to reinvent themselves which can often be long and arduous process. Although this stock looks like a value investors dream, we cannot advise holding this stock for the long term.

Cramer’s Bottom Line on Garmin

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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