First, Garmin (GRMN) - I held this one briefly last holiday season and made some small profits but noted I was officially done with the name on a go forward basis due to it's commodity nature - commodity hardware never ends well. It was a secular growth story earlier in it's life but now we are reaching the stage where it was becoming dangerous to invest in. Back in October I wrote [Oct 31: Restarting Position in Garmin on Selloff]
Takeaway: Garmin is not my favorite name - in the end its a hardware stock whose gross margins will come under attack as it becomes commoditized (in due time). It's a matter of when with this stock.
Again, at some point the party for Garmin ends, and margins will compress so this stock should trade at some discount to growth rates - but at this level it seems the discount is too great. At least in my eyes; and especially with the holiday season approaching.
The stock was at $108 and I was able to knock a nice trade out as we had the Christmas trade on. By early January the stock was just below $70 on an analyst downgrade [Garmin in Free Fall - Why You Need to Understand the Big Picture]. I wrote
I have never held this stock in my personal account for this reason and in fact have watched with a bit of awe and wonder and how this stock is treated so "well" over the past few years - as if it is an Apple (AAPL) type. Again, hardware companies are commodities and price competition will eventually ruin margins. It was just playing Russian Roulette with this type of name, eventually the "bad day" will come. Yes, Apple is in many ways a hardware company but as I keep repeating it is has a cache, design, and style that allows it to charge premium pricing [Apple the Cultural Icon], along with new businesses (phone subscription, iTunes) that have non hardware qualities.
And I stick with that. Now Garmin (GRMN) is near $50. At some point it becomes a value play but I'll let "value" investors play with it. Not a secular growth story in my book anymore. And that's saved investors from a 50% drop with no recovery. Today, Garmin warns
- Shares of Garmin (GRMN - Cramer's Take - Stockpickr) fell hard Thursday after the company's chief financial officer said that first-quarter revenue is expected to slide from the previous quarter.
- In an interview with Reuters, Garmin CFO Kevin Rauckman said that first-quarter revenue for the navigational-device maker is expected to drop between 40% and 50% from the fiscal fourth quarter, which benefited from holiday sales.
- In the fourth quarter, Garmin said revenue doubled to $1.22 billion from the year-ago quarter, with strong holiday demand for the company's navigation devices. Based on Rauckman's comments, Garmin's first-quarter revenue would come in between $610 million and $732 million. The Thomson First Call average estimate for first-quarter revenue currently stands at $731.5 million.
- Because of slumping revenue, Rauckman told Reuters that Garmin will cut manufacturing costs in 2008 to keep pricing and margin pressures at bay.
Second, we have MEMC Electronics (WFR) - which is part of the "solar" trade. I have never owned this one, and missed out on some great upside. But it's in a very similar situation as Garmin, despite being in a totally different sector. For years, MEMC Electronics enjoyed a low profit product - then the demands of the exploding solar space pushed up the prices of its polysilicon product... talk about a "World of Shortages". The stock has skyrocketed. But the end game is coming for WFR. It is in fact, just like Garmin - we don't know when, but the insiders will know before us and the stock will react before us - the stock will "tell us" by it's price action. But why risk it? A huge glut of Chinese polysilicon will be here eventually - maybe in 18 months, maybe 24, maybe 36. I don't know. But the easy money has been made here. And when this glut hits, pricing power will disappear and if you pull up a 5 year chart on MEMC Electronics you will see where the stock used to trade when polysilicon was at "normalized" levels. So I'd actually play this for a "long term" short once the first signs of the Chinese manufacturing really turns into a groundswell. Now with that said, I think MEMC Electronics won't hit 2002-2003 levels because solar is here and a brand new market so the pool of customers for polysilicon will be much larger than it was half a decade ago... but it's a commoditized business (pricing falls, margins get squeezed) and the writing is on the wall. So you can gamble and try to squeeze out some gains in the interim, but again - why take the risk? Today's warning does not appear to be due to what I outlined above, but since I am a big solar fan, and constantly get questions about why I'm not high on WFR, I wanted it out there. But let me also be clear, I don't think there is imminent doom for MEMC Electronics either - it's going to be a long, slow process. (and in the short run, for trader types, heck with the stock hit so much it might be a decent buy for all I know)
- MEMC Electronic Materials Inc., which makes wafers for the semiconductor and solar power sectors, lowered its first-quarter revenue outlook Thursday, citing production issues.
- The company now expects first-quarter revenue of about $500 million and gross margin of about 52 percent, compared with an earlier expectation for revenue of about $560 million and gross margin of about 54.2 percent.
- Analysts polled by Thomson Financial expect revenue of $559.2 million, on average.
- MEMC said that in its first quarter it was impacted by the accelerated buildup of chemical deposits inside the new expansion unit at its facility in Pasadena, Texas. The buildups occurred several times and required several days worth of downtime each for cleaning and re-stabilizing the unit.
- MEMC also said that it had delayed maintenance from the fourth quarter on two existing units while waiting for the new unit to stabilize but had to eventually perform maintenance on one of the units. As a result of the issues, MEMC said the Pasadena facility's utilization was about 20 percent lower than in the previous quarter, and output was much lower than the company had expected.
