Garmin's European GPS rival plotting difficult course

The Wall Street Journal posted a story this morning about TomTom NV., Garmin's European competitor in the GPS market. Here's the story:

TomTom NV shares have lost their sense of direction over the last month, with the stock down by more than a third, as worries about competition and third-quarter earnings lead the stock off route.

TomTom, the Dutch-listed personal satellite navigation firm, has seen its shares swing like a winding road: from a low of EUR2.12 in March, then, after it cut debt by selling discounted shares to investors, rising to EUR13.35 on Sept. 11.

But now the stock is back on its way down, skidding to EUR6.95 a share on Friday, a downturn of 35% from late October levels.

Analysts have focused on two areas in the last few weeks -- results and the threat of increased competition from Internet search engine giant Google Inc. (GOOG).

Taking past performance first, on Oct. 28 TomTom reported that its net income fell 47% in the third quarter of 2009, to EUR31 euros, below analyst forecasts for a profit of EUR36.4 million.

Revenue fell 15% to EUR365 million in the quarter, missing a EUR369 million analyst forecast compiled by Dow Jones Newswires.

The company's results were hit by lower selling prices for its key navigation products in the quarter, with average prices to EUR99, a 27% fall from year-earlier levels and a 12% drop from the second quarter.

The decline was driven by price decreases across a number of products, partly in anticipation of promotional activities in the fourth quarter. We continue to expect that the rate of [average price] decline for the full year will be slower than in 2008," TomTom said.

Writing about TomTom's third-quarter results, Societe Generale analysts said "sales were slightly disappointing and management did not offer any exciting fourth-quarter outlook. In our view this has tempered a lot of the enthusiasm built over the past months around a recovery in the personal navigation device industry."

Future profits were very much also on the minds of TomTom investors on that day after Google revealed that it has upgraded its smartphone software to include a free navigation feature.

In a blog posting, Google said that it will launch Google Maps Navigation, which provides turn-by-turn directions and can be found within Google's Android operating system.

"Obviously the market for such handsets initially will be limited, but Google is resetting the price benchmark for navigation services at $0.00, which puts TomTom's business model into question," said the analysts at Societe Generale.

They called Google's move an "extremely negative development" for TomTom.

Julian Chillingworth, chief investment officer of Rathbone Unit Trust Management, said he's stayed from buying TomTom. "I am slightly dubious about technology companies with one product offering," he said.

But there are some hopes for a u-turn in the stock.

Rival Garmin Ltd. reported results on Nov. 4 and said that its third-quarter profit rose a much-stronger-than-forecast 26% to $215 million.

"Garmin reported a strong increase in the gross and operating margin of its automotive business on the back of solid average selling prices, lower component prices and tight cost control," said analyst Martijn den Drijver at SNS Securities.

Also, Garmin noted that European markets improved markedly in the third quarter compared to the first half of 2009, he said.

"Given that TomTom's largest market is Europe that should be seen as positive as Garmin's market share in Europe has remained steady at 20%," den Drijver at SNS Securities. TomTom has a market share of around 44% in Europe.

Additionally, the average selling price news from Garmin suggests that TomTom's lower third-quarter average price is likely to be a one-off.

"TomTom explained that the ASP was due to earlier than normal promotions and the depreciation of the U.S. dollar," he said.

On valuation metrics, TomTom appears cheaper than Garmin. TomTom trades on 11.2 times estimated 2010 results and 9.0 times 2011 earnings. In contrast, Garmin trades on 12.4 times 2010 earnings and 13.4 times 2011 results, according to FactSet data.

There are questions about how successful Google's move will be as well.