It's road-trip season across America, and that means that at this very moment there are thousands of drivers getting seriously lost. Or stuck in traffic. Or really, really bored.
Lucky for them, the long-promised era of telematics -- the convergence of computers, communications, entertainment and cars -- is finally at hand. So in coming years, if prices for vehicle-based gadgets decline in dealer showrooms as dramatically as expected, the miserable experience of being waylaid, delayed or left without something to play on a steaming summer highway will become as distant a memory as the hand-operated window.
Luxury passenger vehicles, particularly from European manufacturers, are swiftly becoming four-wheeled family rooms, complete with high-end entertainment systems, wall-to-wall telephony, satellite radio, gaming consoles and video monitors that rival theaters in quality. It seems that people of means can't stand the idea of being bored for one second after they leave the electronic cocoon of their homes.
The difference now is that these systems are moving into the mass market as relatively inexpensive entertainment and navigation options find places in moderately valued Japanese- and U.S.-made cars, vans, trucks and SUVs.
It's not just about price, though, especially when it comes to safety and convenience. New navigation systems provide much more than just a flat-screen version of a fold-out map: They give voice directions ("Turn left in three-tenths of a mile; turn left now"), warn of traffic problems ahead and provide alternate routes in real time to help you evade congestion, complete with accurate forecasts of travel times.
Investors have already fawned over high-end DVD/CD/MP3 systems makers such as
Harman International Industries
, as well as content-service providers such as
Sirius Satellite Radio
, sending their shares barreling up the freeway. For now, it appears that the navigation-systems makers and mapping-content providers -- while certainly not desperately undervalued -- might have the greatest appeal to investors.
There are only a handful of companies, and they are well-protected by patents, long-term contracts, brand recognition and management know-how. Probably the best known of the bunch is
, an Olathe, Kan.-based hardware and software manufacturer that has led the drive to make the satellite-based global positioning system a common tool to help people figure out where in the world they are.
GPS for the Masses
Since its start in 1990, Garmin has focused on commercial applications and outdoor enthusiasts, creating fixed-mount and handheld GPS systems for private pilots, boaters and backpackers. Those tools have grown increasingly small, lightweight, colorful and powerful. The company went public in late 2000, and shares have since risen 210% -- 210 percentage points better than the broad market over that time -- to give the company a $5.9 billion market capitalization.
Yet latecomers to the idea should still probably do well buying on inevitable dips, as Garmin's latest earnings report, posted last week, showed that income is rising as strongly as it might at a much smaller company.
Income rose 32% in the second quarter over the same period a year earlier, far exceeding Wall Street expectations. That was largely on the surprising strength of the vehicle segment, as it moves from selling thousands of units per year to a market in which it will potentially sell millions. (Worldwide auto production is 60 million per year, and there are 230 million registered vehicles in the U.S. alone.)
Most analysts were somewhat downbeat on the company going into the quarter, suggesting that its move into lower-priced units in autos would dislocate profit margins. But cost controls forestalled the worst fears. Gross margins sank to 52.9% from 53.6%; they were hurt a little by auto-system sales but buoyed by the highest aviation-segment margins in the company's history, at 67%.
Jeff Evanson, an analyst at Dougherty & Co., lifted his estimates after the news to anticipate 2006 revenue of $1.142 million and earnings of $2.95 per share, which represents an expectation of nearly 18% growth. Placing a price-to-earnings multiple of 23 on that estimate, he gets a price target of $68, which would be a nice 24% gain. Throw in a 1% dividend yield, and this company with virtually no debt and $5.65 per share in cash should find its way into more portfolios.
Garmin's top competitor for commercial GPS applications is
. Sporting a third of Garmin's market cap, Trimble specializes in making satellite-based location-triangulation devices for land surveyors, construction engineers, boaters, aviators and outdoorsmen, though it is moving into the mainstream auto and consumer area in a partnership with wireless carrier
Sales posted in the last quarter were undermined by overly optimistic projections for its innovative agricultural-vehicle business, and the stock was hit hard. Although shares have risen 330% since 2003, they're down about 15% in the past two weeks, and that should provide a decent entry point for newcomers.
Perhaps the most interesting company in the group is the Amerigo Vespucci of the digital world, the Chicago-based mapmaker
. A spin-off of a Dutch consumer electronics conglomerate, it is one of just a few companies in the world that provide proprietary map information for auto-navigation systems such as Garmin's, as well as for Web-based mapping applications such as Yahoo! Maps, MSN Maps and Google Maps. It is also apparently the only one traded in the U.S. (Another large map provider,
, is traded in Europe.)
GPS mapmaking is not a matter of simply buying some paper maps and digitizing them. The company employs hundreds of men and women to drive routes around the world, both to map new territories and to discover nuances such as detours and lane changes. It launched digital maps for five new countries in the first half of the year and said it expects to do at least that much in the second half -- thus opening up brand-new sales territories.
For the early part of its public life, Navteq was just barely hitting earnings expectations with licenses of its proprietary database. But in the last couple of quarters, it has generated real upside surprises. Now it appears to be focused on accelerating its growth path by making acquisitions, such as its recent purchase of a South Korean digital mapmaker.
Navteq's share price is up 75% since coming public a year ago. International sales are almost two-thirds of its business now: In the second quarter, European operations were up 23% to $82 million, while North American sales were up 36% to $40.8 million. Overall, net income in the period was up 65% to $25.3 million, vs. $15.3 million in 2004's second quarter, as service has expanded to 10.2 million miles of roadway and 14 million points of interest in 48 countries, including Mexico, Saudi Arabia and South Africa.
Sales were certainly aided by the major U.S. automakers' programs offering employee discounts to everyone. But most important was evidence of uptake among lower-priced cars and SUVs; top customers are BMW, Toyota, Lexus and Audi. And coming down the pike is a new wave of location-based sales that will make Navteq's database increasingly valuable. Imagine driving down a highway, asking your Navteq-equipped Garmin for a local five-star pizzeria near a freeway exit 10 to 20 miles ahead; ordering a pizza through the wireless-connected GPS device and having it ready for you at the takeout window as you drive up.
Consider that this industry is really still in its infancy, and that margins for this relatively low-profile company are actually improving now that its R&D costs are being spread over a wider revenue base. Consider that the company is free of debt, and that substantial net operating loss carry-forwards gifted to the company from its former parent will make Navteq tax-efficient for the next four to five years. It's easy to become enamored of the company's prospects.
Navteq shares peaked at $48.57 in March, then traded as low as $34.30 amid the large U.S. automakers' travails in the late spring. They have since rebounded to the mid-$40s. With income growth expected in the 30% range over the next couple of years, Navteq's current forward earnings multiple of around 45 is already lofty -- but that is the price you generally have to pay for premium companies hitting on all cylinders.
Pure growth investors probably won't have a hard time buying at this level, but if you're patient and more value-oriented, you may be able to start a position in the mid-$30s in the event of a typical fall swoon for the broad market. Over the next three years, it's probably not overly optimistic to map a course for Navteq's shares to approach $100.