The Little Garmin That Could

With global-positioning product specialist Garmin's (Nasdaq: GRMN) recent earnings report, the company showed some real progress. First and foremost, it exceeded expectations, with revenues climbing 19 percent, led by strong 35 percent growth in the firm's second-largest GPS segment, outdoor/fitness. Meanwhile, the flagship automotive/mobile unit grew by 21 percent.

As expected, however, profit margin pressures continued to squeeze profits on those sales. But here's the good news about falling margins — by taking the hit, Garmin's made real progress in working down its inventories. Up 125 percent year over year at the end of the second quarter, they're now down to a still-too-high, but less frightening 42 percent increase for the third quarter. And management is planning further reductions, possibly putting an end to its inventory glut in as little time as three months.

And the story could get even better. Slowing its inventory pileup helped Garmin generate $202 million in free cash flow, bringing the company's rolling tally up to around $500 million. That gives it a price-to-free-cash-flow ratio of approximately 9, versus predicted growth of 14 percent per year. If free cash flow continues to swell through further inventory liquidation in the fourth quarter, its valuation could get more attractive still.