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.

IN PICTURES: Eight Ways To Survive A Market Downturn

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  4. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  5. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  6. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  7. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  8. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  9. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  10. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  1. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!