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Can Garmin Ltd. (GRMN) Get Over Its Shortcomings?

On Aug. 15, satellite navigation company Garmin Ltd. (NASDAQ:GRMN) moved from No. 10 to No. 4 on DividendChannel’s list of the Nasdaq 100’s most shorted companies, beating out previous fourth-placer, generic-drug company Mylan Inc. (NASDAQ:MYL), along the way.

It may not be the top spot, and it’s slightly lower than Garmin Ltd. (NASDAQ:GRMN) has been in the past, but it still shows the GPS company is one of the most heavily bet-against stocks on the market. Let’s dig a little deeper to see what could be at the root of this new statistic, and whether it means investors should change direction.

Explaining the short
The DividendChannel compiles its most-shorted list by looking at a company’s days to cover, or the number of days it would take for investors to buy the same amount of shares as are being shorted. To find this, take the current amount of shorted shares (or short interest) and divide that by a company’s average daily share volume. Garmin Ltd. (NASDAQ:GRMN) clocked in at 14.10 days, while the Nasdaq’s average is around 4.27.

Garmin Ltd. (NASDAQ:GRMN)As of Aug. 15, the amount of shorted Garmin Ltd. (NASDAQ:GRMN) shares actually went down from 13.08 million on July 31, to 11.63 million. Unfortunately, so did its average daily share volume — that metric came out to 824,265 shares, which is quite the drop from the 1.3 million shares being traded at the end of July.

Weakening hold on the market
So what is causing the drop in shares, and thus the rising days to cover? One possible reason might be Garmin Ltd. (NASDAQ:GRMN)’s shaky hold on its market share.

Over the past few years, Garmin Ltd. (NASDAQ:GRMN)’s revenue has shrunk while its industry’s has expanded, reducing the company’s market share as a result. According to the Satellite Industry Association, in both 2011 and 2012 the satellite navigation industry brought in $32.2 billion in revenue. Garmin brought in $2.71 billion of that, making up 8.4% of market share. This is a 44% drop from Garmin’s 15% market share in 2007, when the industry was worth approximately $20.8 billion and the company was raking in $3.1 billion.

Adding to Garmin Ltd. (NASDAQ:GRMN)’s troubles is of course the fact that more and more people are opting to use smartphones and tablets for their GPS/mapping needs. When Google Inc (NASDAQ:GOOGreleased a new (free) Maps app for iOS users in December 2012, it racked up a stunning 10 million downloads in less than 48 hours, while Garmin only sold 15.4 million units in the whole of 2012. When a company starts to lose its footing in revenue like this, short-sellers and investors alike start to take notice.

Deceptive dividend
Despite its declining revenue, Garmin Ltd. (NASDAQ:GRMN) continues to pay a quarterly dividend that currently yields 4.3%. In June 2012, the company announced it was raising its quarterly amount 12.5% to $0.45 per share.

While that sounds promising, it’s worth noting that Garmin Ltd. (NASDAQ:GRMN) has not exactly been consistent in how much it pays shareholders as of late. Instead of steadily upping its quarterly payout over time (a trait dividend investors love), the company has given special dividends when it can (most recently in June 2011), before cutting its regular payout from $0.75 per share to $0.40. At its current rate of $0.45 per share, Garmin’s payout is still lower than it was when the company first started doling out dividends of $0.50 per share in 2003. For the dividend investor who has been on board with Garmin since its beginning, this stat is hard to ignore, and could serve as a reason to start second-guessing.

A new hope?
Its sales and dividends may be lagging, but Garmin Ltd. (NASDAQ:GRMN) has not given up hope yet. Quite the contrary — the company recently announced plans a foray into the world of wearable action cameras with its new VIRB line of products, which, according to its press release, are “durable enough to capture even the most extreme activities right out of the box.”

The news helped Garmin Ltd. (NASDAQ:GRMN)’s stock jump 7% on Aug. 29, and was met with a healthy amount of analyst approval. However, there’s no guarantee that this sudden shift in a new direction will generate the substantial profit Wall Street is anticipating. This also isn’t the first time Garmin has tried to diversify itself; in 2010 the company attempted to launch its own brand of smartphones, sales of which quickly struggled .

Destination unknown
While Garmin Ltd. (NASDAQ:GRMN) may have spiked some Wall Street interest recently, this doesn’t get the company off the hook with its short-sellers. Diversification can be costly, and in launching a new line of cameras, the company could shift from selling something smartphones do well to selling… something else smartphones do well: recording pictures and video. Just because Garmin is seeing its stock go up in the short term doesn’t necessarily mean that either investors or short-sellers will be convinced of the company’s potential for long-term profitability just yet.

The article Can Garmin Get Over Its Shortcomings? originally appeared on Fool.com.

Fool contributor Caroline Bennett has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 

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