Goldman Sachs is making a negative call on Garmin (NASDAQ:GRMN), adding the shares to the Convicion Sell List:
Source of opportunity
We are adding Garmin shares to the Americas Conviction Sell List as we see roughly 30% downside to our price target of $23. We see meaningful risk to Street estimates in 4Q09 and 2010 driven by our view that the U.S. PND market will deteriorate faster starting in 4Q and gross margins will normalize around 41%, much lower than current levels. Additionally, valuation is expensive with the stock trading at 19X our CY10 EPS estimate (15X Street EPS), a slight discount to the group despite being the only company in our sector with declining earnings next year. We see 13X as a more appropriate multiple given the company's earnings growth trends.
We expect GRMN to move closer to our price target as we believe the market is overestimating the sustainability of the company’s strong 2Q gross margin performance last week. Additionally, much of the anticipated unit strength in 3Q is likely driven by channel fill from newer products, and not a reflection of improving sell-through trends. More importantly, our recent channel checks point to continued weakness in ASPs, supporting our view that PNDs will follow similar a unit/ASP trajectory to other commodity consumer electronics such as PDAs and digital cameras. This, coupled with increasing smartphone cannibalization, will likely drive significant downside to Street estimates in 4Q and 2010.
Valuation Our 12-month price target is $23 based on our sum-of-the-parts valuation ($4/share for its PND business, $15/share for its non-PND business, and $5/share in net cash). We would note that our estimates and valuation reflect improving trends in the company’s non-PND business segments.
Action: Garmin has seen pretty much everything going its way recently: better than expected gross margins for the quarter, channel refills driving unit growth, strength in tech stocks and renewed love for anything car-industry related together with high short interest driving the shares. Pretty much a perfect storm.. but the tide might be turning now.
I like this call from Goldman, I think it makes great sense and also the setup is right. We all know what happens to tech stocks with falling margins and margins are coming down from 2Q levels. Also, Nasdaq looks really topish near-term..
My only problem is getting decent fills without going too low. Would like to get short around $31.5, but might have to take anything above $31 not to be left on the sidelines. If the mkt doesn't go flying today after yesterday's sell-off, would expect to see stock falling around 7-8% today close to $30 level.