Monday, October 1, 2007

Time to Take Profits in Garmin (GRMN) and Overweight Sirf Technologies (SIRF)?

The time to take some profits and underweight GPS device maker Garmin (GRMN) and overweight Global Positioning Chip maker Sirf Technologies (SIRF) might be now.

When cell phone maker Nokia (NOK) recently announced that they were buying Digital Map maker Navteq (NVT) for $8.1 Billion, Garmin's stock price went down around 10%.

Garmin had a close relationship with Navteq, and is a big customer of Navteq. Since the Digital Map space was a duopoly (Navteq (NVT), and privately held Tele-Atlas which was bought by European GPS Device Maker Tom-Tom (TOM2.AS)), Garmin (GRMN) might be squeezed out.

At the moment, Garmin (GRMN) is still reasonably priced with a forward PE of 27, five year analyst growth estimate of 20%, for a reasonable Price Earnings to Growth Ratio of 1.35 (a PEG over 2.0 is overvalued). In addition the automotive GPS market is growing very rapidly, and Garmin is ready to take advantage of this with around a 50% market share. There is also very low navigation device penetration of around 10%, so a lot of the growth is still ahead for Garmin (GRMN).

Garmin (GRMN) does seem to belong in a growth portfolio. But at the same time, the Nokia and Navteq deal signals a change in how the industry is positioning itself for the future.

Why would Nokia be interested in buying Navteq, a Digital map Maker? Global Positioning Services and Applications are a big growth area, and Nokia is aiming to position itself aggressively. GPS applications on cell phones and other mobile converged devices and anything that moves are the next big thing.

One big beneficiary of this is GPS chip device maker Sirf Technologies (SIRF). The company is the dominant GPS chip company and holds a 90% market share, though some say competition can reduce the market share to 70%. Still, a 70% market share in a very large growth business is still a very good market share.

For several months, SIRF's stock price had not been performing well, and has lagged other stocks in the location based service area such as Garmin (GRMN) and Navteq (NVT). Aside from earnings misses, they previously mentioned that there was a slow ramp-up with one wireless customer. Later news seemed to reverse this, as Motorola, the #2 cell phone maker, announced it was going to be using Sirf's GPS chips.

With many growth stocks with forward PE ratios above 30, Sirf Technologies (SIRF) has a PE of only 19, a five year analyst growth estimate of 26.6%, for a very cheap PEG ratio of 0.71 (PEG under 1.0 is very cheap).

There is also great consolidation in the industry (Tom-Tom Buys Tele-Atlas, Broadcom (BRCM) buys Global Locate, Nokia (NOK) buys Navteq (NVT), Trimble (TRMB) buys AtRoad, Pitney Bowes buys Mapinfo (MAPS)), and the demand for pure plays on Location Based Services will be at a premium. With a market cap of less than $1 Billion, who knows if Sirf Technologies (SIRF) will eventually be bought out.

Also, those mutual funds holding Navteq (NVT) and already owning Nokia (NOK), might have to take profits in Navteq and reallocate their capital elsewhere, so they don't overweight Nokia (NOK) too much. Are the mutual fund managers thinking of reallocating the profits in Sirf Technologies (SIRF) as well?

So yes, Garmin (GRMN) may still belong in a Growth portfolio, but maybe now is the time to take some profits and start overweighting companies such as Sirf (SIRF) Technologies.

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