Tuesday, April 19, 2011

Update of Portfolio: Garmin (GRMN)

Not all things are rosy in my portfolio.  I've had some losing positions over the years and this post will be on one of them.  It is the very familiar name, Garmin (Ticker: GRMN).  If you don't know what they do, they are one of the major GPS makers (alongside TomTom).

I had started my position in Garmin when I first started reading Rule #1 back in 2008.  Phil Town liked the stock and I was a Garmin user myself.  I ran some numbers and thought that the company was on solid footing.  I started buying as it fell to $40 from $120.  I thought it was an excellent price.  I continued to accumulate and had a sizeable position, with an average cost of about $37.  As the financial meltdown took its course, Garmin fell all the way to $17.  If only I had cash left at that time, I would have bought more.

Fast forward a few years, after getting paid $1.50/share in dividends and making a small amount in Garmin options, I exited the stock at around $33.50.  I bit the bullet and took a loss, because I looked at my other holdings and realized that my money was doing not much work in Garmin and the potential for growth was smaller than the others (i.e. True Religion, Google, etc.).  All in all, I lost a couple of bucks per share, but the higher costs was really the opportunity cost.

Garmin's Brief History and Current State
Let's look at how Garmin is doing these days.  If you flip through the Rule #1 analysis below, you can see that there's some missing data in MSN Money, but the data that do exist are telling.  Every was rosy until about 3 years ago.  This was when the financial crisis hit and the smartphones started to take off.

Since many people had bought a car GPS by then, the market was beginning to saturate.  Overall growth in the company became stagnant.  It also flopped on its venture into the smartphone space.  In my opinion, it failed not because it did not have a good strategy, but because of poor design choices.  The strategy of using Android as the platform was sound; HTC has become a major force in the smartphone world by adopting the Android OS, so it could be have been done.  The failure stemmed from the lackluster hardware specifications that the Garmin phones had.  Garmin's phone specs could not match those of the likes of Motorola Droid and HTC/Google Nexus One.

    Figure 1: Rule #1 Analysis of Garmin (GRMN)

    However, there is light at the end of the tunnel for Garmin.  As its automotive segment begins to wind down, its outdoor/fitness, aviation, and marine segments are still doing quite well and with great margins.  These segments combined already bring in more net income than the automotive segment.  Garmin will soon find its groove again if it can successfully fend off newcomers such as Nike in the outdoor/fitness segment.

    The rise of China and India also presents some much needed lifeblood for the automotive segment.  So, it is not entirely dead yet.  Garmin pays a nice 5-6% dividend, has a steady cash flow, and its balance sheet is strong.  It's current P/E ratio is 11.2, which is not expensive at all.  Investors have priced it as a steady, if not declining stock.  If the stock falls below $30, it could be start to be a bargain again.

    So, was Garmin a mistake?  Yes and no.  The mistake was exhausting my cash a little too quickly, but who would have known how low it could go back in 2008/09.  If I had only started buying a little later, I would have made some good money.  The company is not exactly a Rule #1 stock now, since it is well past its growth phase, but it could still be a value stock.  The main reason I wanted out was because I saw better opportunities out there.  Taking that loss was difficult, but it's for the better.