Garmin (GRMN): Navigating the competition in GPS

"Even the iPhone from Apple (NASDAQ: AAPL) is now offering handset mapping using WiFi hotspots and Google Maps. Other companies like California's Magellan and Dutchbased TomTom, which has about a 50% market share in Europe, are now going head to head with Garmin in the U.S.

"To compete, Garmin has been on an acquisition spree going after new markets-mostly in Europe and Asia. Just last month, Garmin acquired a Danish company, Fairpoint Navigation, which is a distributor of Garmin's automotive, outdoor recreation, fitness and marine products in Denmark.

"Also recently, the company has been acquiring distributors in Italy and Spain. So far, those acquisitions are too new to show any major benefit but in early 2007, Garmin did acquire distributors in France and Germany and they have led to a significant increase in market share in both those countries.

"In Asia, Garmin is in the process of increasing its manufacturing capacity to keep up with demand. The company is building a third manufacturing facility in Taiwan, increasing the number of production lines to 36 and production capacity to nearly 20 million units annual run rate.

"To break into new markets, Garmin has also been coming up with new personal navigation devices to compete with Nokia (NYSE: NOK) and Research In Motion (NASDAQ: RIMM) in smartphones-which could be a big business for Garmin in the future.

"In the third quarter of this year, Garmin plans to launch a new smart mobile phone called the Nüvifone which puts navigational technology at the heart of the device. The Nüvifone has drawn comparisons with Apple's iPhone for its design, simplicity and touchscreen display.

"Besides new products, a key part of Garmin's strategy is to increase its market share so that it can then sell map updates and real-time traffic information in the future. To do that, Garmin is trying to increase its intellectual property.

"Shares of Garmin were on a tear in 2007, rising 120%, from $55 to $121, in the first nine months of the year. But the stock has come off quite a bit since then thanks partly to general market pressures, worries about increasing competition.

"Currently, the stock trades at about 12 times next year's earnings estimate and has attractive price earnings to growth ratio (PEG) of 0.69. With $745 million in cash and no debt and great growth prospects, I think shares of GRMN look very attractive.

"Especially attractive because, on February 20, Garmin reported the best quarter and the best year in its history. For the year, total revenue was $3.18 billion, up 79% from $1.77 billion in 2006. The company posted earnings of $855 million compared to $514 million in 2006.

"While the stock is down, the outlook is good. While the company will continue to face increasing competition
-- which will put pressure on the average selling price of its products as well as margins -- Garmin has said that it expects 2008 overall revenue will exceed $4.5 billion and EPS will exceed $4.40 per share.

"Garmin has a solid track record and is a key player in the growing market for personal navigation devices I believe that as the company's visibility improves around Garmin's earning power into 2008 the multiple should move higher -- to about 20 times earnings.

"Garmin has said that it expects to generate $4.40 per share in 2008. At 20 times expected 2008 earnings per share, you get a price target of $88 per share-up 50%."

Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.