November 2, 2009 / 4:38 PM / 11 years ago

PREVIEW-Garmin's strong Q3 overshadowed by Google

* WHAT: Garmin Q3 results

* When: Wednesday, Nov. 4

* Strong results expected with EPS beating estimates

* Google entry seen spurring PND decline

By Savio D’Souza

BANGALORE, Nov 2 (Reuters) - What was otherwise shaping up to be a strong quarter for navigation device maker Garmin (GRMN.O) was dampened as its Dutch rival TomTom (TOM2.AS) warned of falling selling prices and, more disturbingly, Google (GOOG.O) made a high-profile entry into the navigation market.

Google’s launch of free software offering real-time, turn-by-turn directions for smartphones last week has shifted the focus away from Garmin’s recent show of strength in its PND segment and back to questions of the segment’s longer-term sustainability. [ID:nLU565010]

The personal navigation device (PND) market has been hit by a slump in demand followed by a fall in selling prices — as highlighted by TomTom — and the advent of smartphones with built-in navigation capabilities.

The navigation market, once a duopoly between Garmin and TomTom, now has to cope with the boom in smartphones with GPS chips, which use satellites to pinpoint the location of a user.

Phones such as Research In Motion’s RIM.TO BlackBerry, Apple’s (AAPL.O) iPhone and offerings from Palm PALM.O and Nokia NOK1V.HE are seen as able substitutes for PNDs.

“We have tended to think that mobile navigation applications would only gradually nibble away at the addressable market for PNDs, but the Google product and price-point suggests the nibble could be more like a gulp,” analyst Yair Reiner of Oppenheimer & Co said.

That “gulp” seemed far off when Garmin’s second-quarter results showed that the rate of contraction of the PND market was no worse than expected and allayed fears that the fall in growth and prices for PNDs would eat into its profits.

Garmin had said it expected third-quarter shipments to rise sequentially with stable pricing and some margin declines as retailers stocked shelves for fall and the key holiday season.

“We believe PNDs will once again be the focus point for holiday promotions,” said Amir Rozwadowski of Barclays Capital, who doubled his third-quarter unit sales growth estimate to 10 percent.

The growth in sales volumes is expected to be complemented by a slight rise in average selling price (ASP) driven by the launch of new products that replaced lower-priced products.

Margins in the quarter are expected to be broadly in line with the company’s expectations of PND margins in the mid-40s and flat non-PND margins sequentially.

Demand across Garmin’s non-PND segments — fitness, marine and aviation — remains broadly steady, Rozwadowski said.

What this means is that Garmin had a strong third quarter and entered the fourth quarter with solid business momentum.

The strength was also reflected in TomTom’s results last week, which, despite disappointing ASPs, showed good trends for units sold, gross margins and expense control. [ID:nLS458927]

TomTom’s numbers implied that Garmin’s ASP and gross margins could also top expectations in the third quarter, helping its earnings per share to beat Wall Street estimates, Reiner said.

Analysts are expecting Garmin to earn 69 cents a share on revenue of $702.3 million, according to Thomson Reuters I/B/E/S.

Garmin’s shares have rallied 61 percent so far this year, despite losing 16 percent of their value the day Google announced its foray into the navigation market.

Garmin shares are usually volatile on the day it reports earnings and a fairly large number of investors are betting against the stock this quarter.

Short interest stood at about 9 percent of Garmin’s total float, as against below 2 percent for some blue-chip technology stocks such as Google and Apple.

“With the demise of the PND business likely to cause a multi-year decline in earnings, finding an incremental Garmin investor won’t be easy,” Reiner said. (Reporting by Savio D’Souza in Bangalore)

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