Friday, April 11, 2008

grmn is lost

one of the most notably weak areas of consumer technology this year has been the GPS group, particularly grmn, which is now down over 50% on the year.

with mobile phones increasingly taking on advanced navigation functions and broader consumer spending patterns in the us and europe coming under pressure, that decline is justifiable. but after that big move downward, oppenheimer has downgraded that stock this morning from outperform to perform. so is this capitulation, and thus time to jump in on? or should investors continue to avoid the falling knife?

grmn has certainly become a cheap stock, now trading at about 9 times next year's expected earnings and about 1.6 times next year's expected sales. in addition, sentiment has certainly turned negative in the face of all the bad news, with analysts getting more negative on the way down. however, grmn is going to have an awfully tough time outperforming going forward, and i think investors should steer clear of the stock.

sector fundamentals, according to negative news out of GPS chipmaker sirf, GPS device-maker TomTom as well as grmn itself, are clearly weakening with no turnaround in sight.

in addition, as i noted above, consumer spending in developed markets is coming under pressure, and in its march sales release, wmt noted that GPS device sales were very strong, and that is actually a negative. gps is now mass market, indicating that the big-growth days are over. in addition, wmt isn't exactly friendly when it comes to handling its vendors, and that relationship will contribute to ongoing pricing weakness. and on top of all that, it is becoming obvious that grmn faces a major problem in terms of investor psychology.

once a momentum theme dies, and the GPS theme is clearly in trouble, it becomes very hard to convince investors to come back on board, despite how cheap a stock can get, especially when it's becoming painfully obvious that the direction of future analysts' estimates is lower, not higher. therefore, even if grmn can beat considerably lower expectations, the stock is likely to just keep selling off, because the psychology is broken.

now, if this were 2005 or 2006, grmn would actually be a buy right now, because there's a very good chance the company would be rescued by a cash-rich LBO firm. grmn has a ton of cash, and it's pretty easy to imagine the company being levered up, having major expense cuts and then coming public all over again. but with the evaporation of the LBO put, those days are clearly over. now i wouldn't be surprised to see the company do a large share buyback, but financial engineering only goes so far, and the selling is likely to continue.

some remaining grmn bulls may believe that the company's mobile phone, due later this year, could help the company pull out of its funk. i don't think so. the phone idea is a completely defensive one and a clear sign of weakness in the core business. plus, aapl and rimm are making a competitive consumer phone market even tougher, and with mot struggling to keep up, i don't believe grmn's going to come in and steal anyone's thunder.

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