August 4, 2009 / 3:07 PM / 9 years ago

PREVIEW-Garmin's Q2 seen on track; outlook remains blurred

* WHAT: Garmin Q2 results

* WHEN: Wednesday: Aug 5

* Q2 expected to be roughly in line

* Q3, Q4 seen to be under pressure

By Savio D’Souza

BANGALORE, Aug 4 (Reuters) - No. 1 U.S. navigation device maker Garmin Ltd (GRMN.O) is on track to meet market expectations in the second quarter as personal navigation device (PND) sales pick up.

However, analysts are unanimous in their view that a shrinking market coupled with increased competition will continue to pose difficult questions for the company.

As with most technology products, inventory stockpiles became a big worry for the company but with demand slowly picking up, resellers are gradually getting around to destocking.

“With de-stocking largely behind us, we expect PND unit shipments to be up significantly on a quarter-over-quarter basis despite relatively weak sell-through trends,” Thomas Lee of Goldman Sachs said in a note to clients.

Last quarter, Garmin’s results took a beating as a severe inventory destocking at retailers forced the company to offer price protection to retailers, meaning it had to take a hit at its selling price and margins.

Lee said he expects Garmin to report largely in-line second-quarter results driven by these one-time items helping PND units sales and ASPs (average selling prices) rather than a favorable view for sustained improvement in the long term.

Analysts on average expect Garmin to post a second-quarter profit of 51 cents a share, before special items, on revenue of $668.4 million, according to Reuters Estimates.

This quarter, Wall Street will also look for color on pricing and carrier announcements for the nuvifone — Garmin’s navigation-enabled smartphone built along with Taiwanese PC maker Asustek (2357.TW) and pitted against the likes of Research In Motion’s RIM.TO BlackBerry and Apple’s (AAPL.O) iPhone.

However, the multiple delays before a launch late last month pose risks to Garmin’s previous goal of one million units in 12 months, said Wedbush analyst Scott Sutherland, who has an “underperform” rating on Garmin’s stock.

After years of blazing the trail, Garmin and its chief rival TomTom (TOM2.AS) have to contend with competition from navigation-equipped smartphones as well as vehicles with in-dash navigation. [ID:nBNG469452]

Two weeks back, TomTom beat second-quarter sales and profit expectations as it sold more devices at higher prices than expected. The company said it saw signs that markets had bottomed even as conditions continued to be “challenging”. [ID:nLM618397]

TomTom’s numbers imply that Garmin’s ASP and margins could also top expectations, leading to an earnings beat as well, said Yair Rainer of Oppenheimer & Co.

However, the re-stocking of inventory that will help the second quarter will mean retailers being replete with Garmin products.

This could lead to sales to retailers being hurt for the rest of the year and force them to assign less shelf space to the PND category through 2010, J.P. Morgan’s Paul Coster said.

The European market, TomTom’s playground, has matured with low replenishment rates, while Garmin’s home turf, the United States, is looking at a similar scenario by the end of year.

“Monthly pricing trends continue to show pressure on an annual basis. PND prices are down almost 48 percent with the worst hit being Garmin which has fallen the most in the past year,” Jonathan Goldberg of Deutsche Bank said.

The threat from smartphones is expected to become more apparent in the second half and the key is how nuvifone tackles this.

Despite seasonal benefits, there is considerable risk to Wall Street estimates for Garmin for the rest of the year, particularly in the fourth quarter, said Goldman’s Lee, who has a “sell” rating on Garmin’s stock.

The company’s stock has gained about 10 percent in the past three months. The shares were little changed at $27.97 in morning trade Tuesday.

“While valuation appears reasonable, we expect the shares to be under pressure,” Sutherland said. (Reporting by Savio D’Souza in Bangalore; Editing by Vinu Pilakkott)

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