Why Pay Extra
Bloomberg quotes J.D. Power as stating that “46 percent of car owners with a factory-installed navigation system said they wouldn’t buy one again if their smartphone app could play on their dashboard screen.” That’s a problem for auto maker margins, since the in-dash GPS is a core function of the high-priced technology being put into cars today.
General Motors Company (NYSE:GM) is particularly susceptible to the in-dash push back because of its OnStar service. It costs about $29 a month for OnStar with directions, with discounts for year-based plans. While this is more than just a GPS service, if directions are all you really use, why spend the monthly fee?
OnStar has over six million subscribers. Automotive News suggests that the division makes around $1.5 billion a year with margins as high as 30%. That’s well in excess of the company’s gross margin of around 7% in 2012. It’s also a nice recurring revenue stream in a business known for economically sensitive and lumpy sales.
While $1.5 billion is a rounding error compared to General Motors Company (NYSE:GM)’s over $150 billion top-line, highly regarded OnStar is also a differentiated selling point. If customers stop caring and spending for the service, the automaker risks losing both a reliable revenue stream and customers. That said, the company is trying to co-op smart phones by selling applications that tie into the car and provide directions. It’s far from clear that these efforts will keep OnStar on target.
General Motors Company (NYSE:GM) shares are up some 80% since hitting lows in the 20’s in late 2012. That’s a pretty solid run considering that General Motors Company (NYSE:GM)’s 6.5% sales growth in June lagged both Ford Motor Company (NYSE:F) and Chrysler. GM’s price to earnings ratio of around 10 is about 1.5 percentage points lower than Ford Motor Company (NYSE:F)’s PE even though Ford Motor Company (NYSE:F)’s June sales growth was roughly twice that of GM’s.
General Motors Company (NYSE:GM) appears to be the laggard in a recovering market. Aggressive investors might want to put their money there, but more conservative types shouldn’t. Longer term, the GPS issue is one to watch if the trend toward avoiding the extra costs of in-dash upgrades shrinks margins.
Bigger Problems
As far as GPS systems go, the company with the biggest problem is Garmin Ltd. (NASDAQ:GRMN). Its sales peaked in 2008 at around $3.5 billion as GPS was gaining in popularity and have headed lower since. That said, it earned about $2.75 a share in 2012, so it makes plenty of money. However, that’s more than a dollar a share below the nearly $3.90 it earned in 2007.
Free directions from smartphones are the basic reason for the company’s struggles since on-dash auto systems account for about half of its business. And one of the company’s big pushes is to try to break into the in-dashboard systems business. If that business moves away from GPS, the Garmin Ltd. (NASDAQ:GRMN) brand isn’t going to hold much value.
Garmin Ltd. (NASDAQ:GRMN) shares yield around 4.9% and the company has no debt on the balance sheet. So more aggressive income investors might want to bet on a turnaround here. However, that’s an iffy bet based on the impact cell phones are having on the GPS market.
Using the GPS
Trimble Navigation Limited (NASDAQ:TRMB) takes a different approach to GPS, integrating it into its products in ways that customers desire. For example, Trimble Navigation Limited (NASDAQ:TRMB) sells a system that automatically steers farm vehicles to optimize performance. Try to get a smartphone to do that!
Using GPS to improve a customer’s efficiency, safety, and accuracy is a clear winner. Trimble Navigation Limited (NASDAQ:TRMB)’s core markets include agriculture, construction, engineering, and defense, among others. The company’s sales have grown from around $500 million in 2003 to over $2 billion last year. Earnings, meanwhile, have almost tripled since dipping during the 2007 to 2009 recession, coming in at about $0.75 a share last year.
That said, the company’s recent PE of around 39 is in line with its five year average, but well above Garmin Ltd. (NASDAQ:GRMN)’s PE of 13. While not cheap, the long-term prospects for Trimble Navigation Limited (NASDAQ:TRMB) are “smartphone resistant” and recent earnings growth has been impressive. Aggressive growth investors might want to take a look.
Free Wins
GM and Garmin Ltd. (NASDAQ:GRMN) are both fighting against free GPS offerings that come along with a product that most people already have and use. That’s an uphill battle, at best. GM’s business won’t be driven by GPS sales, but it’s an issue worth watching since OnStar is an important brand for the company.
Garmin is the GPS leader and is struggling to figure out its place in a changed world, only aggressive income investors should consider it. Lesser known Trimble Navigation Limited (NASDAQ:TRMB), however, uses GPS in ways that should continue to drive its top-line for years to come. While the shares are expensive, the company won’t succumb to the smartphone any time soon.
The article Cell Phones a Problem for GPS Makers, But Not This One originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends General Motors. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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