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Instrumenting Profits: Cannibalization and Legislation
Posted by: Vanina Egea (IP Logged)
Date: September 17, 2013 04:22PM

I like gadgets because they help us to have a more comfortable daily life. Gadgets are available to all industries and aspects of life. Here, I will look in to the navigation sector through Garmin (GRMN) and Trimble Navigation (TRMB).

Leading Cannibalization

Handheld and fix mounted global positioning systems designer, developer, manufacturer and marketer Garmin serves the aviation, marine, automotive, cellular, OEM and recreation industries worldwide. Recent news about the firm focuses on the introduction of new products, its impressive positive effect on performance and skyrocketing stock price.

Garmin's recent performance displayed growth in 4 out of 5 segments in a year-over-year basis. However, it is expected that personal navigation devices will be cannibalized by the introduction of navigating systems in smartphones and in-dashboard navigation for automobiles. But higher margins are concentrated in the fitness and outdoor segments, which are responsible for the recent growth. It is worth noting the recent growth is in line with the firm´s seasonal growth, and no out-of-the-ordinary catalyst is responsible for such performance. Hence, short-term growth is thought to be close to exhaustion.

The long-term strategy for Garmin has not changed: serve underexploited markets at a premium price until competitors arrive, and concentrate efforts in niche markets raising natural barriers. A segment with high returns for the firm is the outdoor and fitness segment, while its most profitable niche is located in the aviation segment. At the same time, the company has successfully differentiated itself from the competition through a friendly interface, and worldwide reach assured great international exposure and customer loyalty. Hence, so long as there are underserved markets and niches with global reach, future profitability is available even with cannibalization in other segments.

The balance sheet for Garmin is very strong. Cash flow continues to increase and no debt has been issued. Currently trading at 15.8 times its earnings, a 46% discount to the industry, the stock is undervalued. I do not share Joel Greenblatt and Jim Simons’ pessimism, because the products offered are much superior to many handheld devices, some of which continue to run a pirated version of the company’s software.

Weather and Legislation

Aiding field and mobile workers to improve productivity, Trimble offers a gamut of global positioning systems receivers, laser rangefinders, and inertial navigation systems for several industries. Additionally, the firm provides software and wireless technologies solutions, catering to customer specific needs. The latest news about the firm announced the release of software data integration capabilities.

Trimble’s last quarterly report has met consensus estimates, aided by a U.S. construction market uptrend, growing technology demand from the agricultural market, and recent acquisitions in the mobile sector. Also, merchandise enhancements, improved cost structure, a more profitable share of software and license revenues and international expansion continue to push growth in the short term. However, long-term outlook does not look as good due to U.S. government regulation and weather conditions.

Trimble's agricultural division has been hit by adverse conditions during the planting season: slow activity in the agricultural segment, especially affecting geographic information systems. At the same time, the Sequester has negatively affected performance, but is not expected to continue doing so. Also, the commercial segment suffered from small fleet extensions, while the engineering and construction segment slowly recover together with the U.S. construction industry, cost-efficient policies have been curtailed by the entrance to emerging markets with low-margin products, and competition continues to grow.

Finances for Trimble are moderate. The stock is currently trading at 35.8 times its earnings, or a 31% premium to the industry average. In this case I disagree with Jim Simons again, and those who followed his lead like Steven Cohen and Ray Dalio’s recent entrance.

Final Thoughts

I remember the first time dad gave me a Garmin navigator. He knew no English and could not understand instructions. So, I have a special feeling for the company. Emotions aside, I believe both companies offer great opportunities for growth in the long term. Both companies offer great products and have been able to differentiate from the competition, carving a competitive niche for each other.

Guru Discussed: Jim Simons: Current Portfolio, Stock Picks
Joel Greenblatt: Current Portfolio, Stock Picks
Stocks Discussed: GRMN, TRMB,
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