IPO Critic: Garmin gives GPS gusto
By Tom Davey
Redherring.com, December 04, 2000
The key to investing in real estate boils down to just three things: location, location, location. Those three words take on even greater significance in the global navigation business where pinpointing your precise position on the planet can mean the difference between life and death.
Garmin (Nasdaq: GRMN), one of the top developers of global positioning systems (GPS), plans to go public on December 8 with a $168 million offering. The company sells 50 navigation-related products, mostly to consumers, boaters, and aviators. Its products can pinpoint a person's whereabouts to within ten meters, as well as provide other readings such as elevation and water depth. Garmin is also working with cellular phone makers to incorporate its technology into their products. The company's revenues and earnings have been rising steadily over the last five years. Garmin's founders, who started the company ten years ago, are still on the management team.
If any company can be a winner in the current hostile environment toward IPOs, Garmin has a good chance. It's less speculative than most of its IPO peers. The offering of 10.5 million shares, or about one-tenth of the company, is expected to be priced at about $16 a share. Garmin will sell 7.9 million shares, and shareholders will sell the remaining 2.6 million shares. The offering, lead by Credit Suisse First Boston, would give Garmin a market capitalization of $1.7 billion.
Garmin's sales have increased at a compounded annual growth rate of 23 percent since 1995, and earnings have grown at a 29 percent clip that period. In the 12-month period through September 30, Garmin had a net income of $99 million on $328 million revenues. Based on the proposed offering price, the market value of this fast-grower would be 17 times trailing earnings and five times sales.
SOUND CHEAP?
If this kind of growth could continue, Garmin would be a steal. Unfortunately, that's not likely to happen. Granted, the ability of GPS to pinpoint one's location on the globe may sound sexy to technology investors who are starved for new ideas. For someone who owns shares in a dominant player, the thought of nearly everyone on the planet eventually buying such a device at a couple hundred dollars a pop is appealing. But compared with some of the hotter technologies, such as fiber optics, GPS is a slow-growth field.
In the overall GPS market there is also plenty of competition. But because of mergers and consolidations, the number of pure-plays has shrunk. Two competitors in Garmin's market are Lowrance Electronics (Nasdaq: LEIX) and Trimble Navigation (Nasdaq: TRMB). Other players in the market cannot easily be compared with Garmin because large parts of their businesses are unrelated.
Lowrence trades at five times earnings and about one-sixth annual sales. But that company's business appears to be on the wane, as evidenced by decreasing sales and lower margins.
Trimble is probably the easiest to compare to Garmin. For the past nine months, earnings and revenues were up 31 percent and 17 percent, respectively. Trimble trades at 25 times earnings and two times sales. Trimble's 55 percent gross margins are also comparable to Garmin. Although Trimble's earnings are expected to grow only about 5 percent next year mainly because of component shortages, the three financial analysts who follow the company expect that earnings will grow 33 percent over the next five years.
PROHIBITIVELY SLOW GROWTH
Despite the glee of the financial analysts, some of whom make a market in Trimble, one has to wonder whether such growth is really sustainable. Analyst Ron Stearns of market research firm Frost and Sullivan projects the overall GPS market in North America will grow 12 percent annually from $2.4 billion this year to $4.6 billion in 2006. In the marine- and land-based recreational markets, where Garmin has about a 50 percent share, Mr. Stearns sees annual growth over that period of about 5 percent and 12 percent, respectively.
In the noncommercial aviation market, where Garmin has an even larger share, Mr. Stearns projects slower annual growth of about 4 percent. Unfortunately, this is the market where Garmin's margins are fattest. And when a company's market share is already high, you have to wonder how much more market there is left.
Overall, Mr. Stearns figures Garmin can at least maintain its share in its key markets. Meanwhile, Garmin will not rest on its laurels. The company plans to use the offering proceeds to expand to other markets, such as automotive navigational systems. But Mr. Stearns doesn't expect Garmin to become a big player in the lucrative automotive market, where others have already gained a strong foothold.
The bottom line: I expect Garmin to grow modestly and steadily over the long haul. It's not a company likely to deliver any fireworks. But unlike most IPO candidates this year, it's not likely to be a big disappointment. |
