by Brad Moon | August 26, 2013 8:54 am
I wrote last week about smartphones and the number they’ve been doing on the digital camera industry. But compact cameras are just one of the gadgets those iPhones and Galaxies have pushed off store shelves. If anything, GPS manufacturers have had it even worse.
One company that’s managed to beat the odds by surviving the smartphone invasion and starting on a slow but steady path to recovery is Garmin (GRMN). Since hitting historic lows in 2009, the company has embarked on a strategy of innovating, exploiting niche markets and strategic acquisitions.
As a result, GRMN has climbed 171% since the dark days of 2009. That’s still nowhere near its pre-iPhone and Google (GOOG) Maps highs, but much better performance than competitors like TomTom (TMOAF), which continue to languish in the basement.
Back in 2007, Garmin reported all-time record revenue of $3.18 billion, up 79% from the previous year. It also sold 12 million GPS units that year. The company was optimistic the good times would continue, and in its 2008 fiscal outlook anticipated sales of $4.5 billion.
2008 revenue ended up being $3.49 billion, a full $1 billion off Garmin’s projection. The smartphone effect had begun, and revenues would continue shrinking in 2009-10. The company was still the worldwide leader in personal GPS sales, but being the big fish in an increasingly shrinking pond is small comfort to investors. Just ask Nokia (NOK) — who was the world leader in cell phone sales for over a decade — how much that crown means now.
By 2009, as consumers were snapping up smartphones in droves and Google Maps was proving that anyone equipped with their free app could now navigate pretty much anywhere, the prospects of selling a standalone GPS unit for $250 looked grim and was only getting grimmer. Garmin stock was at $15, a drop of nearly 88%.
TomTom, another leading GPS manufacturer saw its shares drop 96% in the two years after the iPhone release, and they’ve remained basically flat at that level ever since. Navigon, a German GPS company that had the poor timing to launch its North American presence in 2007 had closed down on these shores by 2009 and was eventually snapped up by Garmin in 2011.
Unlike its competitors, Garmin has managed to rebound. In 2012, it posted revenue of $2.72 billion, ending the year with $2.9 billion in cash and securities. That was enough for the company to pay investors a cash dividend ($1.80 per share) and institute a $300 million share buyback program. In its latest quarterly earnings report, Garmin showed continued growth in most divisions (although sales of automotive and personal GPS units continue to fade), and margins even improved — gross margins stood at 54.3% in Q2 2013.
So what did the company do differently than other GPS players?
It caved in to reality. Garmin released paid GPS apps for iOS, Android and Windows Phone, as did TomTom. But Garmin looked further. It used its cash to acquire a number of complementary and competing businesses — Digital Cyclone (weather alert technology for mobile and aviation), Nautamatic Marine Systems (boat autopilots), Dynastream (personal monitoring sensors) and Navigon.
The company then used its newly acquired technology along with its own GPS expertise and actively targeted new markets instead of just banging its head against the smartphone juggernaut or making do with app revenue.
Garmin developed and marketed ruggedized GPS units for outdoor enthusiasts, marine GPS systems, boat automation systems and fish finders. It pushed hard into personal fitness with GPS watches that boast heart rate sensors and GPS-equipped devices aimed at bicyclists. It has even expanded into selling GPS units for tracking pets.
Garmin still sells personal GPS units and automotive units (including as OEM equipment for car manufacturers), but as those segments have continued shrinking, the company has found ways to innovate and explore niches where smartphones aren’t a direct competitor.
Once again, there are signs of danger on the horizon, this time in the form of wearable technology. A good chunk of Garmin’s revenue mix comes from its “Fitness” division, which currently accounts for 12% of Garmin revenues. Other devices like handheld GPS units and GPS devices aimed at outdoor enthusiasts are spread across other divisions.
All of these products could be threatened when Samsung (SSNLF), Apple (AAPL), Google, Microsoft (MSFT) and others begin to release their own smartwatches, which is virtually inevitable at this point. At the same time, Apple seems determined to force its way into becoming a major automotive systems player, with “iOS in the Car” being its latest initiative.
Garmin appears to be doing anything but sit still. A new heads-up display device that works with a smartphone running Garmin’s GPS app lets any driver experience the HUD technology typically found as an expensive option on a very expensive car — for only $129.
And recent news that the company is launching a line of GPS-equipped, high definition, ruggedized, wearable VIRB cameras (a la GoPro) has had analysts predicting Garmin will outperform expectations this year. Last week Dougherty & Co upgraded its price target on the stock to $50 on the news.
The company might have to weather the approaching smartwatch storm, but Garmin has proved that it’s a survivor, and it has cash on hand should it choose to buy its way into another niche. In the meantime, it could have a big holiday quarter thanks to those VIRB cameras.
After the stock’s recent pause (where it’s been more or less flat), GRMN definitely has the potential to continue its four-year climb.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2013/08/garmin-a-smartphone-survivor/
Short URL: http://invstplc.com/1nv5DC8
Copyright ©2017 InvestorPlace Media, LLC. All rights reserved. 700 Indian Springs Drive, Lancaster, PA 17601.