The Best Player in the GPS Devices Market?

Many car drivers have been noticing the increasing popularity of GPS navigators, they are offered optionally on many new models, but most people get them by purchasing them in a specialized electronics store. Investigating companies with a very low amount of debt made me fall on a very familiar company: the GPS maker Garmin Ltd.

Garmin Ltd. was incorporated in the Cayman Islands on July 24, 2000 as a holding company for Garmin Corporation, a Taiwanese corporation, in order to make possible a public offering of Garmin shares in the U.S. Credit Suisse, First Boston and Merrill Lynch were the lead underwriters of their 2000 initial public offering, selling 21.0 million shares at $7 per share. Garmin owns all of the operating companies in the Garmin group.

As stated by the company, Garmin Ltd. provides navigation, communications, and information devices, which are enabled by global positioning system (GPS) technology. Garmin has two segments: consumer, which accounted for about 91% of their 2008 revenues and the remaining 9% from the aviation industry. Consumer products include handheld GPS receivers, portable automotive navigation devices, and fixed-mount GPS/Sounder products, which are used in automotive, marine, and recreation applications. Aviation products include GPS and VHF navigation enabled receivers.

What makes this company very interesting is the fact that the it has been growing very impressively, and at the same time gaining a big market share of GPS receivers. At the end of 2008, the company had no long term debt. The common shareholders' equity of the Garmin Ltd. has been growing by 29% over the past five years. There is little probability that the company will achieve such levels but it is a great point to start from. The last five years 30% profit margin also ensures that their profits will remain strong even after such difficult economic conditions as we witnessed in 2008 and throughout the rest of 2009.

2008 was, as for many companies, a very difficult one for Garmin Ltd. Still, longer-term growth generators will aid profits. The company has quite a lot of new and improved software devices to be introduced shortly. These improvements will boost the features of existing items in its mapping, aviation, and other business segments, thus giving the company an even greater competitive edge and market-share lead. It also has launches for two new phones within the next couple of months. These actions will likely increase advertising costs, but should increase awareness about the company, too. Also, Officers and directors own a cumulative amount of 45.8% of common shares. This ensures that they are very likely to take actions that will be favorable to the shareholders of the company.

At current prices, I estimate Garmin Ltd. To be a great long term buy and should provide satisfactory performance over the next 10 years.

10-year target selling price: 73$

Disclosure: The author has no position in GRMN but intends to initiate one in the coming weeks.

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A Small Year for iStar Financial

A couple of weeks ago, I wrote an article about a REIT I am currently invested in that goes by the name of iStar financial (NYSE: SFI). The position of a long term investor gives the advantage of having quick access to financial statements as soon as they are issued. This year, I have been very disappointed by the performance of the management of, this REIT, which was, before 2008, the soundest of such companies in my opinion.

In the upper stated previous article, I elaborated on the attractiveness of iStar, which unfolded to be a yield trap, meaning by that a dividend so attractive that it cannot be sustained forever. At the time of my first analysis of iStar, their average quarterly dividend for the last five years hovered around 70 cents per share. This amounts to roughly $2.80 per year. With an average cost per share of 3.98$ such a dividend would provide a staggering dividend yield of 70%! Such a yield is mouth-watering for a value investor and many dividend investors have probably noticed the same phenomenon. The only problem is that the board of directors decided to suspend the company dividend during the last half of 2008, at the same time making the company’s stock less attractive relatively to the initial reasons that made iStar Financial so appealing.

The annual letter by chairman of the board and chief executive officer Jay Sugarman was more of a desperate call for shareholders not to leave the company’s beaten down stock than a real explanation of what happened. Plus one of the matters that had to be voted in the annual shareholder’s meeting was the board of directors proposed vote in favour of the 2009 Long-Term Incentive Plan and Performance-Based Retention Award to the chairman and Chief Executive Officer. The plan allows Jay Sugarman to get compensated in stock about every three years relative to the performance of the company. They justify the plan by with the fact the company purchased about 32.6 million shares between July 1st 2008 and March 31st 2009. The only reason I disagree with the plan is that in three years, iStar’s performance will be significantly better than in 2008. Jay Sugarman will be automatically awarded for the good performance of the company. I just hope the stock price will be significantly up enough to ensure little dilution of shareholders’ wealth. This is another good example of the institutional imperative.

My only solace is that the company proceeded to a huge share buyback program, thus bringing the common stock count from 133 million shares to 105 million as of December 31st 2009. This is great news since it will allow the company to spend proportionally about 21% less cash when they reinstate their dividend. At the time of making the investment in iStar, or in any dividend paying company for the long term, a yield of 10% is enough to justify a 10 year commitment from my capital. Taking this into assumption, iStar needs to have a quarterly dividend of at least 10 cents per share to make a long-term investment worthwhile.

Disclosure: The author is long on SFI

Liddy Intends to Step Down

As it is now common knowledge, AIG (NYSE: AIG) has been considered by the US government as being the only company that was not involved in the banking business, but was big enough to affect the global financial system due to the seize of its credit default swaps portfolio. It thus acquired the critically recognized expression of being too big to fail in November 2008, at the moment the whole financial world got scrambled. At that precise moment, the US government was forced to bail out AIG, providing it the staggering rescue amount of $185 billion. That is an amount larger than any single bank received to better manage the financial crisis. In exchange for the 80% ownership stake that the government got at that time, the Obama administration appointed Edward Liddy as the chairman and CEO of the troubled firm.

Liddy used to be the chairman of the insurance company Allstate and served on the board of Goldman Sachs. He has been a seasoned leader for insurance and financial companies and was definitely the right person to occupy such a critical position in the leadership of AIG. His announcement about his pending resignation after the end of the restructuring at AIG was quite surprising. It is happening sooner than expected, but it is fully understandable for two reasons. First, due to all the scandalous events surrounding former AIG executives, Edward Liddy got a total compensation of... $0. That includes his salary, stock options and warrants. His only financial solace came from about $500000 of tax advantages from a government who wanted to make sure Liddy did not end up paying to work as chairman and CEO of AIG, which would have been pretty embarrassing for the treasury department. A second reason that would justify a resignation is that Liddy was actually in retirement at the time he was asked to step up to the plate.

However, the task he faces seems to be a lot more impressive than expected. In his opinion, AIG will be able to reimburse the US government after about 3 to 5 years. From a value perspective, that makes AIG a company that has nothing interesting to offer to investors. Also the fact that AIG might be reverse-splitting their stock is only a short term solution to keep the stock from being unlisted from the NYSE as soon as they reinstate their tough guidelines.

From all that information, I would lead to assume that AIG is currently fairly valued by the market. Even after they managed to showcase $20 billion of revenues in their filing for Q1 2009, they are still a long way from their profitability of previous years. There is also a lot of uncertainty about AGI’s earning power. According to Liddy, the company still has to be spitted; which would respond to the US government’s need to have very few companies “too big to fail” under their oversight. In the meantime, for a value investor, AIG seems to be a company to pass over, at least for the next 3 years, or when they start to be profitable again.



Disclosure: The author has no position in AIG.