Baird commenting Garmin (NASDAQ:GRMN) following survay of 23 North American electronic retailers in the last week regarding customer trends for GPS-based devices.
Given their conversations, firm believes Garmin continues to maintain positive sales momentum and is likely holding share in North American PND. They also believe that many customers are gravitating towards more feature-rich units, particularly as pricing declines further. Despite these positives, firm maintain their Neutral rating based on the following factors:
First, they believe holiday price pressure is increasing. All surveyed stores suggested prices on Street Pilot and Nuvi units declined by roughly 10%-20%. TomTom units also declined by similar price amounts.
Second, they are concerned that component prices, which had been falling and aiding Garmin's cost structure, are now beginning to stabilize. Given the price pressure, firm is concerned that margins may face added pressure.
Third, they believe Europe is likely to become increasingly difficult given that Garmin needs to work through near-term distribution conflicts involving sell-through pricing - some dealers are not offering the lower pricing structure desired by Garmin.
Given these factors, firm is reducing their 2006 EPS estimate to $2.06 from $2.07, and 2007 EPS estimate to 2.36 from $2.43.
Price tgt goes to $47 from $49.
Notablecalls: GRMN has had a nice run in the past few days and this note will end this. Another reminder that high margins are not sustainable in this sector. Expect the stock to react accordingly.