(NASDAQ:GRMN): SHORT

David Noel

November 18, 2009

BACKGROUND

Share Price (11/18) 32.35

Diluted Shares Outstanding (mm) 202FYE: Dec-31 2008 2009E 2010E 2011E 2012E 2013E

Diluted Shares Outstanding (mm) 202

Market Capitalization ($US mm) 6,520

Total Cash 1,029

Total Debt 0

Minorities / Preferred 0

Enterprise Value ($US mm) 5,491

52 Week Range ($US) 14.40 - 39.65

% of 52-Week High 82%

Avg Daily Value (3 months) 117

as a % of Market Cap 2%

FYE: Dec-31 2008 2009E 2010E 2011E 2012E 2013E

Multiple EPS (2011) Price % change

Upside 14.0x 3.20 44.80 38%

Downside 10.0x 1.30 13.00 -60%

EPS 3.69 2.96 1.97 1.17 0.62 0.41

y/y growth -20% -33% -41% -48% -34%

Consensus EPS 3.01 2.54 2.26 NA NA

EV / EBITDA 7.5x 9.4x 14.2x 22.3x 28.4x

P / E 10.9x 16.4x 27.6x 52.6x 79.4x

P / E Consensus 10.8x 12.8x 14.3x NA NA

FCF Yield 9% 6% 4% 3% 2%

MISPERCEPTION: TENSION IN THE STORY

� The decline in PND market is structural, not cyclical, and represents a powerful secular headwind

� “PNDs contain absolutely nothing proprietary except the software interface, which is easy to replicate,” and “there’s no reason applications on smartphones will not approach the friendliness and feature-richness of PNDs- quickly.” - Eric Gattaker, Editor, GPS World

PDA Analogy: Experts again underestimating the speed of the technological obsolescence effectPDA Analogy: Experts again underestimating the speed of the technological obsolescence effect

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THESIS POINTS

� Smartphone applications will cannibalize PND sales in the near-term

� A late entry in the highly-competitive smartphone market will not meet expectations

� Margins will deteriorate from scale reductions and declining ASPs as hardware becomes obsolete

� Growth avenues are limited given GRMN’s expertise

CANNIBALIZATION: THE FALL OF THE PND

� Smartphones now come equipped with advanced GPS applications, rendering the standalone PND obsolete

� Google recently announced its free Android 2.0 application with GPS and turn-by-turn directions

� TomTom released a top of the line $100 GPS application for the iPhone and Blackberries

� “In-dash GPS systems are safer because they are a big buying commitment. PNDs are in trouble because they are cheap, and the smartphone provides the same are in trouble because they are cheap, and the smartphone provides the same function at the same or lower cost,” Director of Product Planning in Navigation at a leading global electronics company

$200+ $99

HAIL MARY: THE NUVIPHONE

� Garmin released its Nuviphone in October, over a year later than planned. AT&T already announced it will likely reduce the price due to weak sales and management was hesitant to reiterate guidance on Q3 earnings call

� “The Nuviphone seemed like a ‘credible’ device at first but it took so long that the current Android phones already do what it does but at a cheaper price” –Marin Perez, Editor, InformationWeek

The Nuviphone will compete with entrenched leaders like RIMM and AAPL, � The Nuviphone will compete with entrenched leaders like RIMM and AAPL, and is priced out of the competition

MARGIN DILUTION: INSULT TO INJURY

� Margins will be squeezed from both sides of the equation

� Prices will come down rapidly as PNDs become commoditized, obsolete hardware

� Garmin’s cost advantage will be disappear as overall scale decreases

� Market misperception: Segment valuations using historical margins are irrelevant if PND shipments decline significantly. Scale reductions will reduce GRMN’s cost advantage, diluting margins in other segments.

� “If PND shipments decline, the other segments will definitely be in trouble, as volume � “If PND shipments decline, the other segments will definitely be in trouble, as volume

is the primary cost driver in electronics.” - Robert Lorimer, Managing Director, Position One Consulting

� Return on Incremental Invested Capital deteriorating quickly

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ROIC Already Declining on Pricing Weakness

MARGINAL RESPONSE: “GAAP GROWTH”

Where did this $34mm reversed accrual go???

Management: “It was favorable to our gross margins”

to the tune of ~450bpsB

GROWTH HOPES: NOWHERE TO GO

� GRMN missed the window of opportunity to diversify into the less capital intensive, higher margin software business

� GRMN committed to hardware by producing its own phone, while its primary competitor TomTom invested in developing smartphone applications

� Market mispercetion: PND producers cannot gain meaningful traction in the auto OEM market

� “It would be very unlikely for [Garmin] to sell in the OEM market on a large � “It would be very unlikely for [Garmin] to sell in the OEM market on a large scale due to much higher quality expectations and a lack of expertise in audio/video” (as most OEM’s buy full entertainment packages) - Director of Product Planning in Navigation, Global Electronics Co

� “GRMN would receive 30-40% of current ASP if sold to tier ones or 60-70% if direct to autos” - Robert Lorimer, Managing Director, Position One Consulting

VALUATION: STILL JUICE IN THE LEMON

DCF Growth Discount Value

Multiples 11E EPS 11E P/E Value

Base 0.268 4.0x 1.07

Bull 2.974 6.0x 17.85

Bear -1.141 2.0x -2.28

Noncore Segments 10E P/E Value

Outdoors 15.0x 10.82

Outdoors @ 40% GM 15.0x 4.80

Marine 7.0x 1.36

Implied Equity Value

PND/MOBILE SEGMENTVALUATION SUMMARY

DCF Growth Discount Value

Base (2.0%) 10.0% -1.77

Bull 0.0% 9.0% 26.75

Bear (5.0%) 11.0% -8.84

Sensitity of Base DCF

($6.8) 0.0% (2.0%) (4.0%)

9.0% ($6.3) ($8.3) ($11.8)

10.0% ($5.3) ($6.8) ($9.3)

11.0% ($4.5) ($5.7) ($7.5)

Marine 7.0x 1.36

Aviation 8.0x 1.82

Share Value of Noncore Segments 7.98

PND/Mobile Segment

2011 Multiple 6.0x 0.31

DCF -5.38

Total 0.00

Add Cash/Investments 9.46

Implied Share Value 17.44

KEY RISKS

� Legislation preventing the use of smartphonenavigation while driving

� Growth in other segments: fitness/outdoors, marine, aviation

� Share repurchase program

� Exit of competitors from PND hardware (TomTom is already diversifying, as stated above)

� Success in higher-margin software development

� Growing or flat shipments in PNDs with strong pricing

� Takeover at a premium

TIMING: SHOOT THE SHORT IN THE BACK

� Initiate short position now: ~100-250 bps� “If not now, when?” � the first hiccup is past

� Capitalize on superior capital base� Capitalize on superior capital base� Minimal timing risk for MII since holding period is flexible

� Monitor signposts: Confirm thesis is still working � PND market growth and GRMN segment results

� Smartphone GPS updates and legislation

� Nuviphone sales and reviews

� GRMN margins: pricing power and costs

FINAL THOUGHTS: WHERE’S THE EDGE?

� INFORMATIONAL EDGE: PNDs are doomed to be cannibalized quicker than the market believes

� ANALYTICAL EDGE: Margins in GRMN’s other segments will be severely diluted by the PND decline

� CONCLUDING QUOTE:

“The best shorts are those with fundamentally flawed business models that have suffered irreparable damage. Regardless of the stock price, you can sleep at night, knowing each day the company is destroying value.”

- John Griffin, Blue Ridge Capital