While working on the road this week, I brought along my two-year-old GPS device to help navigate unfamiliar roads. Trouble is, the darn thing repeatedly gave me directions that landed me at dead-ends or blocked-off roads. Maybe it's because the software is out of date.
I decided to use my smartphone instead, and the step-by-step directions on my Android phone were impeccable. I suddenly realized I will never buy a standalone GPS device again. Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL)'s ability to constantly update their software makes the choice a no-brainer.

As a pure coincidence, I also just reviewed the recent data of insider buying and selling in the past few weeks. Which company showed up? Garmin (Nasdaq: GRMN), one of the leading providers of GPS devices. Donald Eller, who has served as a director since 2001, sold 88,000 shares in mid-August (worth a hefty $3.6 million).

Frankly, I can't blame him. Nor can I blame other company directors such as Gene Betts and Gary Burrell, who have also been active sellers in 2012. They likely see the writing on the wall for this company. And with shares now up nicely from the early-2009 lows (and not far from all-time highs), they're getting while the getting is good.

Good numbers -- for now

A recent look at second-quarter numbers gives the impression that Garmin's business is still reasonably healthy. Sales of $798 million and earnings per share of 98 cents were handily above forecasts (though aided by some one-time gains). Total sales were up 7% from a year earlier, which gives the impression of renewed vigor after this company saw sales drop 16% in 2009, another 9% in 2010 and rise only 2.5% in 2011. The auto/mobile segment, which accounts for more than half of sales, grew a solid 8%.

But analysts increasingly say that such a performance can't be repeated. Analysts at D.A. Davidson say the auto/mobile unit will likely post a small year-over-year drop in the third quarter, and a more significant 12% drop in the fourth quarter. They see sales of Garmin's auto/mobile GPS devices falling another 10% in 2013 to around $1.4 billion. That's down from $1.7 billion in 2010.

"Given the size of the PND (personal navigation device market) is nearly four times the size of Garmin's next largest segment (outdoor), we forecast the shrinkage of PND will be hard to make up with faster growth in other areas," note Davidson's analysts.

Garmin's supporters insist that the company can still remain relevant by building revenue in other categories such as fitness, which comprises hiking and orienteering users. So analysts at Goldman Sachs were surprised to find that second-quarter sales in this segment grew just 5% from a year ago, below their 15% forecast. "This will likely fuel a key driver of the bear thesis, namely that growth in fitness will slow due to rising low-end competition," they noted recently.

Yet it's the threat smartphones represent that few are talking about. Apple and Google continue to beef up their offerings: Apple, for example, will be including turn-by-turn navigation in its soon-to-be-released iOS 6 operating system for its line of iPhones and iPad mobile devices. Moreover, the number of smartphone users continues to rise, and every new user is one that conceivably no longer needs a standalone GPS.

Risks to Consider: Garmin's management has set a low bar in terms of guidance for the next few quarters, so it's unlikely the company will miss guidance in the third or fourth quarter.

Action to Take --> Despite the clear headwinds in place, shares still trade for almost 15 times projected 2013 profits. That's also the multiple sported by other high-tech hardware firms, such as Dell (Nasdaq: DELL), Hewlett-Packard (NYSE: HPQ) and Research in Motion (Nasdaq: RIMM) before their growth began to slow. Insiders are likely aware that the current forward multiple may not stand as sales growth flattens or turns negative, which explains why they are starting to jump ship.

Related Articles
  1. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center