$GRMN Q4 Earnings Preview

by Dan February 19, 2013 1:18 pm • Commentary

Event:  GRMN reports Q4 earnings tomorrow morning prior to the open.  The options market is implying about a 6% move on earnings which is rich to the 4 qtr avg move of ~4.5%.

Sentiment:  Wall Street analysts are fairly mixed on the stock with 6 Buys, 5 Holds and 2 Sells, with an average 12 month price target of $48.75, or 24% higher than current levels.  Short interest sits at ~13.5% of the float.

Option Volume / Open Interest: Total open interest is slightly skewed towards Puts with nearly 60%, while the 20 day average volume btwn puts and calls is almost dead even.  The largest single lines of open interest are 2100 of the March 39 calls, 1700 of the April 42 Puts, 1100 of the Apr 37 Puts, 1000 of the April 41 & 38 Puts and 1000 of the Jan14 45 calls.  

Price Action / Technicals:  Stock has been a fairly large under-performer this year, down 3.25% ytd, and down almost 6% from the spike after the company’s addition to the S&P 500 index in early Dec.

The 3 year chart (below) shows a fairly obvious triangle that looks very likely to see a break one way or the other on the next bit of news.

[caption id="attachment_22815" align="aligncenter" width="589"]GRMN 3 yr chart from Bloomberg GRMN 3 yr chart from Bloomberg[/caption]


Valuation / Fundamentals:   On the surface, GRMN is very cheap company, at about 13x expected 2013, the only obvious problem is that earnings and sales have stopped growing, and are expected to flat-line or even decline a bit over the next couple of years.  If the company was able to re-accelerate earnings, their balance sheet with 35% of their market cap is in cash (equal to their annual sales), with no debt and a dividend that yields 4.6% could be easily viewed as one of their largest assets.

BUT, and here is the big BUT, the company relies on personal navigation devices (PNDs) and automotive sales (auto/mobile) for more than 50% of their sales, another quarter of their sales comes from their Outdoor/fitness segment.  I don’t see how Google Maps and Apple Maps’ turn by turn directions FOR FREE don’t destroy the long term viability of their business model.

Vol Snapshot:  March vol is about 40 with the Puts at about 5 points higher than the calls which reflects the scheduled dividend on the 13th. Historically the average volatility is up into earnings but not off the charts compared with recent earnings events. Here’s a look at the last 2 years with IV30 in red and HV30 in blue:

[caption id="attachment_22817" align="aligncenter" width="602"]Screen Shot 2013-02-19 at 9.34.33 AM from LiveVol Pro[/caption]

Volatility in March and beyond should find the mid to low 20’s following the event depending on the direction and strength of the move.

MY VIEW:  As I said this earlier in the MorningWord:

The company is clearly at a crossroads, and how they choose to spend their cash to redirect will likely be one of the most important decisions the company will every make. To stay the course will likely prove to be fatal, but an ill advised trans-formative acquisition could have a similar result. Given the company’s strong cash flow generation and no current leverage I would assume this could be an LBO candidate, but your guess is as good as mine as I have not seen it on any short lists. GRMN is a very tightly held company with the top 6 holders representing nearly 50% of the shares outstanding, and 40% of which are founders or insiders. With nearly 14% of the float short, my sense would be that if the company lays an egg on Q4 and substantially guides down for 2013, GRMN may very quickly be on the tip of banker’s tongues.

Just as I would not have bought DELL late last year on its fundamentals, I would not buy GRMN either, but DELL’s recent history could serve to be instructive to other floundering tech companies with massive leverage on the financial engineering front.

Given the recent disappointment from competitor TomTom in Europe, expectations are not exactly running high into the print, but Goldman Sachs, who rates GRMN a Sell had the following to say about the qtr and guidance in a not to clients dated Feb 15th:

We forecast Q4 revenue of $796.4mn, up 18% qoq and down 12% yoy (below five
year average Q4 qoq growth of 36%) and below the Street at $833.8mn. Similarly, we are below consensus on EPS and estimate$0.64 vs. the Street at $0.74. We are most out of consensus in the Auto/Mobile segment. We also see downside to FY13 consensus
estimates, and are 4%/7% below consensus on FY13 revenue/EPS.

The set up, clearly seems bearish from a sentiment standpoint, but the options market doesn’t not seem to be pricing in too much as the implied move looks fair.  This one may fall into the category of wait and see and possibly play for a counter trend.  If the stock got nailed and made new 52 week lows, this could be a name that popped to the top of lists for financial engineering.