Wednesday, February 22, 2006

Garmin Rides the GPS Wave

Global positioning systems are penetrating the mainstream, and Garmin (GRMN) is fueling the fire.

Garmin makes GPS devices & software geared toward the aviation, automotive, boating, and outdoor recreational categories.

The company reported solid numbers today. 4Q sales rose 45 percent to $319.3 million from $220.9 million a year ago while net income jumped 83 % based on strong sales in its consumer division. Garmin said it wants to do $1.3 B in revenue in F2006.

We like Garmin's robust balance sheet (over $300M in cash and zero debt), solid management, and expanding presence in Europe.

Garmin has a terrific top line story and we believe a burgeoning GPS market here in the US, coupled with myriad cell phone-related opportunities, will serve Garmin well in the quarters ahead.

The firm already pockets healthy 30% profit margins and room for growth in the GPS space is virtually unlimited.

Risks to our thesis include component costs, valuation concerns, and corrosive competition from PDAs & sundry other GPS add on units.

On an enterprise value basis, Garmin trades at 8x revenues and 18x EBITDA. The stock currently trades at 27x earnings, but has traded as high as 32x earnings in the past.

Additionally, a lack of alliances among aviation entities (which enable Garmin to diversify its revenue sources) or a slowdown in its Asian markets could threaten our top and bottom line story.

Based on today's conference call and our aggressive outlook for further GPS penetration abroad, we are raising our price target to $71.

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