February 25, 2006

GPS, GPS, GPS

Lojack, Sirf, Garmin, Trimble. These are four plays on the growth of GPS and as an extension, asset protection. I like both and although no leader in these combined industries has emerged, if you want to participate in the growth of GPS, you should consider these.

I have written about all four in the past so will spare the review, but Barron's had a nice piece on the proliferation and "tipping point" in GPS and I though it was worth enclosing:


Monday, February 27, 2006
Finding True North
By JAY PALMER
THINK BACK TO WHEN CELLPHONES, DVD players and big-screen plasma TVs became popular. In each case, when prices fell just far enough, the products moved from being the play things of wealthy early-adopters to hot-selling mass-market items. This year, there's a very good chance it will be the turn of portable satellite-based navigation devices for cars, boats and hiking trails.

These gizmos, which can be held in the hand or mounted on dashboards, have been plunging in price. Many models are priced not far above $500, down from well over $1,000 a few years ago, setting the stage for a surge in demand. Industry analysts and executives figure that total sales could double this year, from more than $2 billion worldwide in 2005.

That's good news for Kansas-based Garmin International (ticker: GRMN) and its two European rivals -- Tom-Tom, based in Amsterdam, and Magellan, a unit of French defense contractor Thales (THLEF). Increased sales volume for the firms should offset the effect of lower prices on profitability, at least for now. In fact, Garmin last week reported an 82% jump in fourth-quarter profits, to $87.1 million, or 80 cents a share -- far ahead of analysts' expectations. Earlier, TomTom reported a threefold increase in fourth-quarter net.


It's sometimes said that real men don't have to ask for directions. Now, no one has to. Finding your way on the road, in the woods or along a hiking trail is easy with model like these from TomTom (top left), Garmin (top right) and Magellan.

Garmin, with a market value of $7.1 billion, is probably the best bet for U.S. investors. The company commands more than half of the U.S. market, which is growing faster than the larger, more mature European market. And the stock is easier to trade, since TomTom shares are listed only on European bourses. Thales, meanwhile, is far less than a pure play, and its Magellan unit has been losing market share.

Although the consensus among analysts has been that Garmin will earn $2.86 a share this year, up 4.4% from 2005, that may underestimate the surging demand for navigation devices. John Bucher, an analyst at investment firm Harris Nesbitt, figures that earnings will more likely be $3.11, up 14% from 2005. He sees the stock heading to nearly 80, from 65 now.

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"We think this will be a year of the mass market," adds Kevin Rauckman, Garmin's chief financial officer "There are tremendous opportunities for growth."

Indeed, fewer than 5% of all relatively new, actively driven cars in the U.S. have any kind of satellite-navigation device, Bucher says. Even in Germany, the European country with the highest penetration, the figure is only 15%.

The devices, increasingly compact and stylish, come with built-in road maps, marine charts or trail guides. Taking readings off the U.S. Defense Department's network of 24 global-positioning satellites, they use a small LCD screen to display a moving map that shows exactly where you are. Punch in an address, and the unit will calculate and display the best route to get there.


Prices of basic models -- like Garmin's Quest, TomTom's Go300 or Magellan's RoadMate 300 -- are falling to close to $500, although upscale models still go for close to $1,000. By the end of this year, some industry observers expect prices at the low end to approach $300. "At some point -- no one knows exactly where -- we will come to a point where we see a completely new explosion in demand," says Alexander Ribbink, TomTom's chief operating officer

Of course, there will be challenges, too. As cheaper units come to account for a greater share of total volume, profit margins inevitably will be squeezed. At the same time, the market's strong prospects are attracting new competitors. Outfits like Alpine (APNI.OB), Blaupunkt, Cobra Electronics (COBR) and Kenwood are zeroing in on the market, along with Asian giants like the Panasonic unit of Matsushita (MC). Next month, Sony (SNE) is due to launch its first Nav-U unit, at $600.

Neither Garmin nor TomTom plays down the threats, but both figure the tide will rise fast and furiously enough to lift all boats. The established firms, especially, should do well in the short-term, not least because they've forged strong ties to big retailers like Best Buy and Wal-Mart.

Another potential challenge: the market for built-in navigation devices on new cars. Although available for many luxury cars, this gear is expensive -- sometimes $3,000 -- and hasn't caught on in a big way. If the approach gains popularity, however, the leaders in portables may have to vie with such instrument makers as Honeywell (HON) for car makers' allegiance. For now, however, the action is clearly in portables, which a consumer can use in multiple cars, including rental cars for business trips.


It's true that Garmin's stock isn't cheap. It trades at about 21 times analyst Bucher's earnings estimate for '06, versus a multiple of 17 for the Standard &Poor's 500. But the company's earnings growth could go a long way in justifying that premium.

Portable navigation isn't Garmin's only growth engine: It also has a thriving business in navigational instruments for aviation, accounting for about one-quarter of total sales. For instance, it's boosting sales of "glass cockpits," which combine navigation aides and other instruments in one panel, for both light jets and smaller commercial aircraft.

TomTom, by contrast, is totally focused on the auto business, where it continues to expand. The company last year stormed the U.S. and, following a marketing blitz, gained nearly 25% of the market by year end, according to data that research firm NPD provided to TomTom.

Garmin, however, has begun matching TomTom's prices, and it's holding its market share roughly even, leaving Magellan to feel the pain. "We have not lost any market share to TomTom," says Garmin's Rauckman.

As the skirmishes heat up, one thing is clear: The market for navigation gadgets is about to find true north.

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