MorningWord 2/19/13: $GRMN – Potential Wrong Turns Abound, Save One

by Dan February 19, 2013 9:06 am • Commentary

MorningWord 2/19/13:  Sometimes when it comes to trading, I like to kick it Ol’ Skool by looking at company whose products I can see and feel in everyday use, or in the case of GRMN, RARELY see or feel.   The evolution of GPS devices from personal navigation devices (PNDs) a decade ago, to nearly universal in car navigation to now FREE turn by turn directions on Google Maps Apps (or if you feel like getting lost, Apple Maps) for nearly every smartphone has the potential to bring a multi-billion industry to its knees, if it hasn’t already.

I started looking at GRMN a few weeks back when I saw the gap on volume in late Dec on the announcement that they were being added to the S&P500 index (below).

GRMN 2 yr chart from Bloomberg
GRMN 2 yr chart from Bloomberg


Over the past few years when the smartphone wars have been raging, and casualties have been mounting (PALM, MMI, RIMM, MSFT, NOK), GRMN’s failure with their NUVI-phone a few years back has widely been forgotten.  As I do more work on the name I am trying to get a sense for their continued reliance on the auto/mobile segment in a VERY crowded field where cannibalization will be a new way of life for their entire suite of product offerings.

I am writing about the company this morning because they are slated to report Q4 earnings tomorrow before the bell.  The options market is implying about a 6.25% move vs the 4 qtr avg move of about 4.5%.   On the surface this a very cheap company, as 35% of their market cap is in cash, which is also equal to their annual sales.  They have no debt and pay a dividend that yields 4.6%.  The only obvious problem with the stock, 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.

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.   I will likely do a deeper dive preview later today.