Locate Profit With GPS Technology (TRMB, GRMN, HON)

By Dean Lundell | July 03, 2007 AAA

Years ago only the military had access to the Global Positioning System (GPS). Now we all have access to it in our cars and even our phones. We're going to examine three GPS companies (one small, one mid-sized and one large) to see where they're headed.

Unique Position
Trimble Navigation Ltd. (Nasdaq: TRMB) is the smallest of our selection with sales of just over $940 million and a market capitalization of roughly $3.8 billion.

The company manufactures advanced positioning products with applications including surveying, agriculture, machine guidance, construction alignment, asset and fleet management and telecommunications.

Trimble's products employ technology from laser, optic and inertial disciplines that is then combined with GPS systems and highly advanced proprietary computer software. Trimble touts the broadest patent-protected portfolio in the business with over 700 patents, and Trimble's products are so powerful that they are accurate to within less than an inch.

The company is headquartered in Sunnyvale, California but has about 3,400 people spread over 18 countries. It actually does business in over 100 countries through a network of dealers and distributors. The company grows internally as best it can, but is constantly on the lookout for acquisitions that can add to its strategic capability.

Financially, the firm does fairly well, seeing a 19.5% growth in earnings last year and averaging 32.2% for the past three years. Its 49.7% gross margin gives it a net margin of 10.7% and a return on equity of 13.4%. Trimble budgets 11.5% of their gross revenue to research and development. (For more on return on equity, see Keep Your Eyes On The Roe.)

Too Much Competition
Garmin (Nasdaq: GRMN) is our mid-sized company in this group with sales over $1.94 billion and a market capitalization of roughly $16.2 billion. The company manufactures GPS devices for automobiles and aircraft. Garmin's financial results are enough to make any CEO, green with envy. Garmin's growth in earnings, while averaging 42% over the last three years, came in at almost 65% last year. Its net margin of just over 29% is derived from a gross margin of over 49%, and its return on equity is over 38%. To top it all off, Garmin devotes 6.3% of its revenue to research and development. Sounds great, but there is a problem.

The company has almost been too successful. The market has now become saturated. Management must be sickened as it watches late-comers like Europe's TomTom, Sony (NYSE: SNE), LG Electronics, Pioneer and a host of others piggyback on Garmin's success. The auto component, which is 65% of GRMN's revenue, has become commoditized and margins are under pressure. On the bright side, its aviation component (15% of sales) is far more protected. Anything that is used in aircraft is far more proprietary; furthermore, anything approved for use under instrument flight rules (IFR) has very high barriers to entry.

At the end of the day, the one thing that will rescue Garmin is its commitment to research and development.

Woefully Undervalued?
Honeywell International (NYSE: HON) is our large company with a market capitalization of almost $44 billion and sales over $32 billion. Formed under a pooling-of-interests transaction in 1999 with Allied Signal, Honeywell has prospered under the leadership of CEO Dave Cote. Product management has been reorganized to better serve the interest of HON's customers.

Pick any benchmark you'd like and Honeywell is better or improved. The results have showed up in the company's financials; its earnings growth has improved from averaging 17% for the prior three years to coming in the 35% last year. Honeywell is only seeing a 6.8% net margin from a gross margin of 23.4%, but its return on equity is 21.8% - all the more respectable when you consider the size of company. R&D figures are considered classified information for defense contractors, so it is unlikely that you will find any recent figures for HON.

Despite spending $4 billion on restructuring charges and $600 million (from a reserve of $1.4 billion) in asbestos liability payments, HON continues to pay back money to shareholders in the form of increasing dividends and an aggressive share repurchase program ($1.8 billion in 2006).

What Now?
Over the past two years, Garmin has appreciated 220% compared to Honeywell's rise of about 60%. Garmin's P/E is 28-times, and Honeywell's is 21-times. Also, Garmin's market capitalization is 7.95-times its sales, Honeywell's is 1.40-times. However, when dealing with the market, the past is not necessary a portent of things to come.

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