Garmin Stock Is Crashing: Needham's Richard Valera Explains Why

In a report published Thursday, Needham analyst Richard Valera maintained a Hold rating on Garmin Ltd. (NASDAQ: GRMN).Garmin pre-announced preliminary 2Q15 results with in-line revenues and lower-than-expected gross and operating margins due to forex headwinds and pricing pressures. Increased R&D and advertising expenses drove the company's EPS lower.The company expects its 2Q15 revenues to be in the range of $770-$775MM with gross margins and operating margins expected to be 54 percent and 21.5 percent, respectively. The softness in the company's fitness segment is expected to have been offset by market share gains in the Marine segment."Concerns on the competitiveness and potential negative margin implications of Garmin's new markets such as Fitness trackers, smart watches and action cameras have been one of the factors keeping us on the sidelines," analyst Richard Valera said.Valera pointed out that although the company had reiterated its full-year revenue guidance, it had reduced its earnings guidance significantly. The company expects to post 2015 revenues of $2.9 billion with annual fitness revenue growth projected to grow by 25 percent, driven by sell-through improvements and new product launches in the second half.Garmin has guided to full year gross margins of 54-55 percent, lower than the earlier guided 56 percent, mainly due to continued currency headwinds and aggressive pricing. Increased R&D and advertising are expected to restrict the company's operating margins, guided to 20-21 percent, down from the earlier guidance of 23 percent, the report noted.The company has reduced its EPS guidance for 2015 from $3.10 to $2.65.