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| | Street Patrol
GPS maker's profits, prospects soar
Talk about global positioning: Garmin's sales jump 102% in Europe and 86% in Asia. Company announces a stock split. I see more gains ahead.
By Robert Walberg
Global-positioning-system specialist Garmin mapped out one heck of a first quarter.
The company, which designs and manufactures gadgets that help their owners figure out where they are in the world, posted an 86% jump in earnings per share and a 67% surge in sales.
With the exception of Garmin's (GRMN, news, msgs) aviation division, which saw sales increase by 4%, its business units posted growth of 21% or better. The biggest sales driver continues to be the sales of GPS units installed into cars, with Garmin's autos unit posting a 252% increase in revenues. That unit accounted for nearly 46% of total sales.
The company is achieving success across the globe. Sales in Europe -- where Garmin is gaining on Dutch competitor TomTom -- were up 102%, to $101.9 million. (TomTom can be found on the pink sheets under ticker symbol TOMAF.) Gains in Asia and the North America were up 86% and 53%, respectively.
Management attributed its strong growth to the introduction of new products and the growing demand for GPS navigation systems. As if management hadnt already done enough for shareholders by guiding the company to a blowout quarter, the company also announced that its board of directors had approved of a 2-for-1 stock split and a post-split cash dividend of 50 cents a share.
Not surprisingly, the stock -- a Street Patrol portfolio holding -- is up more than 8% in todays trading on well over three times the average daily trading volume. And theres no reason to lighten up on this leading player in the red-hot Personal Navigation Device market.
A far-from-saturated market
As the price of these devices continue to come down, their acceptance with consumers is skyrocketing. Even if you opt not to upgrade your new car with a built-in navigation system, the company is making a number of attractively priced units that can be installed later. These items are likely to see the same type of explosive growth as satellite radio -- without the excessive payments to Howard Stern or Major League Baseball.
Obviously, lower price points threaten operating margins going forward. But even with price cuts in its automotive segment, Garmins operating margins rose by 0.3 percentage points last quarter.
Increased competition from TomTom, which recently entered the U.S. market for the first time, could put additional pressure on margins, but I doubt it will be a serious issue for some time to come. The market for navigation devices, especially in autos, is just opening up. At this point in the growth curve, demand should be strong enough to prevent a destructive price war.
Another iPod?
In fact, Garmin raised its sales and earnings guidance for the remainder of the year. Bolstered by the introduction of new products and by favorable holiday-sales forecasts, the company now sees sales exceeding $1.4 billion and earnings of $3.40 a share. The Street had forecast earnings of $3.25 a share on revenues of $1.31 billion.
Wall Street underestimated the strength of the Garmin brand and the demand for its products, much as it did for Apple (AAPL, news, msgs) during the early stages of the iPod craze. So look for a slew of ratings and earnings upgrades over the next few weeks. Theres nothing like strong earnings, an impending stock split and Wall Street analyst upgrades to goose a stock.
At 28 times estimated fiscal-year 2006 earnings, Garmin is still relatively cheap especially when you consider that it grew its bottom-line by over 86% last quarter and is forecasting similar growth going forward. This is a stock that could easily command a multiple of 40 times current-year estimates, which establishes a price target of $136 (pre-split), or another 42% above todays price. As such, Ill keep the stock in my Street Patrol portfolio.
Buy KongZhong
Separately, I would like to add a small Chinese company by the name of KongZhong (KONG, news, msgs) to my portfolio. Not only does it have a really cool name, but the companys wireless interactive product offerings target a fast-growing market. Sales and earnings are projected to grow by an average of about 24% over the next couple of years. Currently, the stock sells at 16.8 times current-year estimates of 80 cents a share. Assuming it hits its targets, the stock has upside to the $18 area over the next six to 12 months.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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