Shares of U.S. leading GPS navigation aid maker Garmin (Nasdaq:GRMN) turned on the boosters last week, sending the shares soaring to a nearly 24% one-session gain following the release of second-quarter numbers that handily blew past analysts' expectations.
A combination of lower costs and better-than-expected sales allowed the company to report adjusted earnings per share of 83 cents, well ahead of the 51 cents analysts had been expecting. Also helping boost investor sentiment on the stock was positive chatter from the company regarding next quarter's outlook. Product shipments for the third quarter are now expected to rise sequentially with prices stabilizing.

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GPS Product Market Stabilizing
That suggests that conditions in the navigation device market may have bottomed. During the second quarter, Garmin's unit sales fell by 5% while the average unit selling price price hit $180, a drop of 23% year-over-year. Earlier numbers from rival satellite navigation maker TomTom (OTC:TMOAF) have also loaned support to the view that the market for these devices was stabilizing, as its unit sales and prices were both ahead of expectations. Some analysts are now shifting their EPS forecast for 2009 to about $2.60, and the shares are trading at about 13 times expected earnings. That's still relatively cheap relative to TomTom, which now trades at 20 times 2009 forecast earnings, which falls at the high end of expectations. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Short Covering Helped Fuel Stock Price Jump
The upward shift in earnings expectations for this year was no doubt a major contributing factor in Garmin's one-day price jump, but also adding fuel to the fire was the sizable short position in the stock. Bearish investors in the stock would have had to scramble to buy up shares in an effort to "cover" their short positions, pushing prices ever higher. Some of this covering also appeared to have been accomplished through the purchase of call options on the stock, as trading in these derivative products surged. Current option valuations are now implying that the stock should gain an additional 12% this year.

Analysts Still Skeptical on Longer Term Prospects
But while analysts were quick to revise their short-run views for Garmin upward, most remain reluctant to call the stock a buy at this juncture. Veteran Wall Street shop JP Morgan even took the price jump as an opportunity to issue a downgrade on the stock. Such bearishness is linked to the view that standalone GPS systems don't have much of a future when major smartphone players like Apple (Nasdaq:AAPL), Research In Motion (Nasdaq:RIMM) and Nokia (NYSE:NOK) are busy adding GPS functionality as a standard item in their handsets.

Seeing the writing on the wall, TomTom is now planning to move away from hardware to selling high-quality mapping data. It also recently unveiled an app to run on Apple's iPhone. For its part, Garmin is betting that it can take on the big smartphone players with its own phone, but delays have held up its release.

The Bottom Line
While Garmin's shares are up due to the improvement in near-term prospects, the price rise appears unsustainable in view of the absence of a credible strategy to deal with the threat to its core business from the mobile phone players. Garmin's plan to launch its own smartphone into the current uber-competitive market for such devices looks like so much tilting at windmills at this juncture.

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