JP Morgan Resumes Coverage of Garmin (GRMN) With An Underweight With A Target of $30.50

JP Morgan has resumed coverage of Garmin GRMN with an Underweight rating and a December 2011 price target of $30.50. According to the analysts, Paul Coster, CFA, Marija Krgovic and Mark Strouse, CFA, due to the completion of J.P. Morgan’s involvement in the transaction announced on May 03, 2010 the firm is now resuming coverage. "We believe Garmin will deliver in line in Q2 owing to continued growth in outdoor/fitness sales and a mild recovery in marine unit sales. Longer term, we expect GRMN to experience a sharp secular decline in its core PND/Auto business as consumers gravitate to turn-by-turn navigation on mobile phones and in auto cockpits." In addition, they expect a solid Q2. "We look for GRMN to report $0.71 EPS on sales of $681.2 million (Street: $0.72/$681.3mm); PND/Nuvifone sales of $441mm, with potential upside from a possible replacement cycle kicking in. We look for continued y/y growth in outdoor/fitness sales and a recovery in marine sales. The CFO, who presented at the J.P. Morgan Tech conference last week, believes demand in 2Q is holding up well and that channel inventory remains lean." The analysts forecast 2010 EPS of $2.63 on sales of $2.77bn. "We anticipate a modest y/y recovery in marine and 6% increase in aviation sales, 6% increase in the outdoor/fitness category, and an 11% y/y decline in auto/mobile sales." They believe GRMN’s revenue will decline further in 2011. "We forecast $2.19 EPS on $2.45 bn of sales. We believe GRMN can be managed for cash earnings, which could lead to higher EPS on lower revenues, but this would necessitate termination of R&D investments in the Nuvifone, and aggressive curtailment of operating expenses. Our model assumes continued investments in R&D and brand." As such, they rate the stock an underperform. They note that the stock will underperform the mean of their coverage universe in the next 6-12 months. "The stock is trading at 12.7 times our CY10 EPS estimate of $2.63. Our December 2011 Price Target is $30.50, based on an assigned multiple of 14 times CY11E PF EPS of $2.19. The multiple is a slight premium to the stock’s 2-year mean P/E multiple (NTM basis) and is approximately aligned with the market multiple." The stock is currently trading at $33.37 +$.27. Garmin Ltd., together with its subsidiaries, designs, develops manufactures, and markets global positioning system (GPS)-enabled products and other navigation, communication, and information products worldwide. It operates in four segments: Automotive/Mobile, Outdoor/Fitness, Marine, and Aviation. The company was founded in 1990 and is based in Camana Bay, Cayman Islands.