By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics

Apple and Google enter automotive navigation market

When competitors enter new markets with disruptive technologies or pricing, it is worthwhile to pay attention. New competition can sometimes easily destroy incumbent companies which are market leaders. Think of a recent case of how Apple Inc. (NASDAQ:AAPL) and iPhone quickly destroyed Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) that had more than a 50% market share in the mobile phone market. In June 2013, Google Inc (NASDAQ:GOOG) completed acquisition of Waze, an Israeli startup that develops mobile map and navigation applications, for almost a billion dollars. The acquisition, as reported by Google, is expected to enhance the user experience by offering real time traffic and navigation information.

Google Inc (NASDAQ:GOOG) is expected to announce a few new initiatives in the area of partnerships with car manufacturers and development of systems based on Google Inc (NASDAQ:GOOG)’s Android software. For example, Google partnered with German car maker Audi to integrate its Android operating system in the dashboard of future Audi models. At the same time, Apple Inc. (NASDAQ:AAPL) is making its own inroads into the automotive space and is working with car makers to embed its iOS’s Maps and Siri services into cars.

Company overview

Garmin is a leading worldwide provider of navigation, communication and information devices and applications, most of which are powered by Global Positioning System (“GPS”) technology. Garmin designs, develops, manufactures and markets a diverse family of hand-held, portable and fixed-mount GPS-enabled devices for the automotive, outdoor, fitness, marine, and general aviation markets. The automotive segment is a major source of profits at Garmin and is responsible for about 55% of company’s total revenue and 37% of operating income.

Garmin’s shares have a low free float of 59.5% as 40.5% of shares are held by insiders – the company’s officers, directors, and their families. Short interest in the stock is relatively high – Garmin Ltd. (NASDAQ:GRMN) is the second-largest shorted component in the NASDAQ 100, with short interest amounting to 16 “days to cover”, 8% of total shares outstanding or 14% of free float shares.

Current valuation

Based on a recent price of $46.58 per share, Garmin Ltd. (NASDAQ:GRMN) has a market capitalization of $9 billion and an enterprise value of $7.9 billion. The company is valued at an EV/EBITDA multiple of x11.4, based on 2012 financial results and at an EV/EBITDA ratio of x12.8 based on annualized 9 months of 2013 financials. Garmin was able to show good results in terms of free cash flow generation: company generated average free cash flow of $791 million annually for a period of 5 years in 2008-2012. Free cash flow declined to $646 million in 2012 and currently stands at $585 million (annualized based on 9 months of 2013). Company also enjoys a low tax rate environment, in part due to the Taiwan-related tax benefits, which might not continue indefinitely. On the balance sheet side, Garmin has no debt and has $1.2 billion in cash, cash equivalents and short-term marketable securities. In addition, Garmin Ltd. (NASDAQ:GRMN) has $1.6 billion of long-term marketable securities, which have maturities of more than 1 year and are valued using “Level 2” fair value accounting standard. This amount is not included in the calculation of an enterprise value and EV/EBITDA multiple, and adds additional comfort to the balance sheet. Company is paying a quarterly dividend of $0.45 per share which represents an annual yield of 3.9%. Comforted by dividend yield, good balance sheet, and past free cash flow generation ability one might not find Garmin a good candidate for an outright short. Nevertheless, recent market developments might warrant careful monitoring by investors.