3 Reasons to Invest in This Auto Infotainment Market Leader

Source: Harman International.

Harman International (NYSE: HAR  ) , a leading infotainment services provider to the automotive industry, has seen its share price double over the past year, significantly outperforming the S&P 500 Index, which rose by 16% over the same period.

What are the reasons for Harman's outperformance? Is Harman still attractive at current valuations? Also, how does Harman compare with its automotive supplier peers such as Delphi Automotive (NYSE: DLPH  ) and Visteon (NYSE: VC  ) ?

Leveraging on the rise of the connected car
The concept of the connected car, a vehicle equipped with Internet access to provide its driver with both useful information and entertainment, has garned lots of attention and interest in recent times. Harman remains one of the best stocks to capitalize on growth in this area by virtue of its market leadership. Harman is the world's leading provider of automotive infotainment solutions, having 22% of global market share and nine of the 15 largest OEMs as its clients.

Other companies benefiting from the rise of the connected car include Delphi Automotive and Visteon.

Visteon became the second-biggest player in vehicle cockpit electronics after it bought Johnson Controls' electronics division in January this year. With the automotive cockpit electronics market estimated to expand at a 10% CAGR between 2014 and 2017, Visteon has introduced new products to grab a share of the market. One example is its new Horizon cockpit concept, which incorporates elements such as gesture control and virtual touch screen, allowing drivers to control things like interior temperature, audio, and navigation with greater ease.

Delphi is another automotive supplier that has its sights fixated on the growing infotainment market, which it projects to sevenfold from $2 billion in 2012 to $14 billion in 2016. Since November last year, Delphi has started selling "Delphi Connect," its in-vehicle connectivity platform to U.S. cellular subscribers. Delphi Connect will enable its users to record travel details and monitor the location and health status of their cars. Looking ahead, Delphi is targeting incremental revenues of approximately $0.4 billion from its connected infotainment business by 2016.

While Harman isn't the only player in the automotive infotainment market, there is a key reason why it's the leading company. Harman is a pioneer in the space and also a technology leader. It was the first in the market to integrate different aspects of infotainment such as navigation and multi-media into a single platform and introduce new advanced technologies such as turn-by-turn navigation (1997), modem in-car systems (2008), and cloud-based platforms (2010).

Moreover, it has in excess of 1,900 patents and patents outstanding, which ensures that its valuable intellectual property is protected. In contrast with Harman's scalable platform allowing for the incorporation of new features, most of its competitors offer point solutions that can't keep up with the changes in technology.

The results speak for themselves. Harman won three major orders worth $1.2 billion last year with major OEMs Daimler, Volkswagen, and Ssangyong. As of the third quarter of fiscal 2014 (year ended June), its order backlog is at a record high of $19 billion.

Source: Harman International.

Emerging market growth opportunities
It's only possible to sell automotive infotainment solutions where cars are sold, so it makes sense to operate in locations with strong vehicle sales growth. Based on its research compiled from various industry sources, Harman estimates that passenger vehicles sales in the BRIC region will grow at a CAGR of 13% between 2013 and 2016, compared with a more modest 6% CAGR globally.

Harman has more than 1,000 employees based in Brazil, China, and India, and its efforts have paid off. Its revenue contribution from emerging markets has increased more than tenfold in just five years to go beyond the $500 million mark.

Strong balance sheet positive for capital allocation
Harman is currently in a net cash position, and its gross debt-to-equity ratio is low at 15%. It also boasts $1.3 billion worth of liquidity, comprising $567 million in cash and short-term securities and $746 million in undrawn revolving credit. This gives Harman the flexibility in terms of capital allocation.

On one hand, Harman has the potential to invest in both capital expenditures and accretive acquisitions to drive growth. On the other hand, it retains the option of returning excess capital to shareholders. Harman sports a forward dividend yield of 1.2% and still has $186 million remaining from its share buyback authorization. 

Foolish final thoughts
Harman enjoys a huge head start over its competitors in the race to dominate the global infotainment market. As the first mover and market leader in the space, Harman benefits from high customer switching costs. Given that auto companies aren't likely to change suppliers once they sign the agreements, Harman has a higher probability of becoming the infotainment supplier of choice. In addition, Harman's strong balance sheet limits downside risks, while its presence in emerging markets suggests significant growth upside.

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