Many years ago, in the days before GPS, I had a healthy fear of getting lost. Before going anywhere unfamiliar, I’d get explicit directions. 

Today, there’s absolutely no excuse for such a fear. It’s a lot harder to get lost today than it was 25 years ago. As a result, the fortunes of companies such as Garmin (Nasdaq: GRMN) have risen considerably since the dawn of the 21st century.

#-ad_banner-#From 2005 to 2008, GRMN seemed to go in only one direction: up. However, with the onset of the financial crisis, a sluggish economy, and increasing competition, has Garmin lost its way? Critics might say so, but the company is far from lost.

New Directions
Garmin has been too reliant on its automotive segment, which accounted for $919 million in sales in the fiscal third quarter, 55% of the company’s total. While nearly a billion dollars in sales is nothing to sneeze at, that total was down 13% from the same quarter the previous year. There were some bright points, such as a multi-year agreement with Mercedes-Benz to be an OEM (original equipment manufacturer) for navigation equipment. 

In contrast to the automotive unit, Garmin’s marine and fitness divisions, two higher-margin units, are growing rapidly. Marine equipment sales rose 24% in the third quarter, and the fitness division performed just as well, posting 25% growth.

The fitness segment is probably the most exciting story in the new-product category. Facing stiff competition from athletic powerhouse Nike (NYSE: NKE), among others, Garmin has leveraged its strength as a consumer navigation electronics brand by introducing Vivofit, a wearable fitness band that tracks users’ progress toward their fitness goals. Vivofit is also integrated with the fitness community section of Garmin Connect, the company’s online presence.

Look for sales in the fitness segment to spike with the onset of the new year and the usual fitness-related resolutions. The marine business can be expected to improve in the spring as boating season gears up. 

Strong Balance Sheet = Takeover Candidate?
Despite the challenging environment Garmin faces, the company is well prepared financially. The company has no long-term debt and a $3 billion pile of cash and marketable securities sitting on the books. That’s a third of the company’s $9 billion market cap. 

	Flickr/spacedust2019
	Garmin has been rapidly growing its fitness division in an attempt to become less reliant on sales from its automotive segment.

Also, insiders have been acquiring the stock. While that’s not uncommon at the end of the year due to stock options and restricted stock vesting and awards, it does merit discussion. Over the past few weeks, officers and insiders have acquired over 40,000 shares of the stock. Even more intriguing, the company’s founders, Min Kao and Gary Burrell, are the largest individual shareholders, at 17.3% and 15.6%, respectively.

No debt. Founder control. A pile of cash. A strong brand with patents but increasing competition and weakening sales. Sounds like a company ripe for a buyout. 

Microsoft’s (Nasdaq: MSFT) recent acquisition of Nokia’s (NYSE: NOK) wireless handset business is evidence of the trend of a company acquiring an additional hardware platform to integrate into its portfolio. But Garmin is more than a hardware company; its software would make a great compliment to an existing hardware platform. A prime example is an automaker (like Mercedes) integrating Garmin technology on its platform. 

Risks to Consider: Garmin’s sales have been noticeably declining over the past couple of years. While the company may “own” the navigation space, what’s the real long-term value of that space? GPS technology is standard on just about every smartphone platform, so cheap accessibility to the technology continues to proliferate. Garmin also spends 12% of net sales on research and development, which should help mitigate this threat.

Action to Take –> Despite declining sales in its core business, Garmin is a well-managed company. Currently, GRMN trades near $46 with a forward price-to-earnings (P/E) ratio of 18 and a dividend yield approaching 4%. Based on the company’s fundamentals, a 12-month target price of $60 looks attainable through accelerating earnings growth (management recently hiked its 2013 year-end earnings forecast from from $2.30 a share to $2.45, a 6.5% increase). That target price is also a fair takeout price (that is, Garmin’s value if it were to be taken private), representing a 30% premium from current levels.

P.S. My colleague Nathan Slaughter, Chief Investment Strategist for High-Yield Investing, agreed with me when he profiled Garmin in November. He covers stocks just like GRMN every month, and he recently zeroed in on a stock that not only pays a yield over 10% but has seen revenue grow 484% between 2010 and 2013. Ordinarily, investors have to sacrifice income to achieve that type of growth. But in this case, the company has been able to invest and expand and still have plenty left to pay shareholders big dividends. To learn more about this company, click here.