Garmin GRMN reported third-quarter results that at first glance show sequential improvement. However, recovering from dismal conditions earlier this year has not changed our outlook for the firm, which still faces a long-term secular decline in its core business.

Garmin launched the nüvifone, a smartphone with GPS capabilities, in an attempt to get ahead of the inevitable trend toward converged devices. However, we feel Garmin is pushing into a crowded field with little chance of success. Additionally, we think Garmin overestimated its ability to break into a market that is controlled by unfamiliar parties, the wireless carriers. Garmin confirmed today that results have been much slower than expected and slow sales have already forced a price cut. Even at $199 we remain skeptical that many consumers will opt for the nüvifone from AT&T T when they could snag the iPhone for $99. In addition, due to lower margins, even moderate sales growth from phones is unlikely to have much ability to offset gross margin erosion in navigation devices. At this point, Garmin should be trying to squeeze cash out of its core businesses, not destroying capital chasing overcrowded markets.

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