The A to Z of RFID

Radio Frequency Identification, or RFID, is a hot technology now, and it's going to get even hotter come 2005. The U.S. Department of Defense and a few retailers including the world's largest -- Wal-Mart (NYSE: WMT  ) -- will make sure of that. By next month Wal-Mart will require its contractors and largest suppliers to tag their deliveries with passive RFID chips.

Unlike those slacker UPC bar codes, RFID chips can communicate with electronic readers to provide efficient and immediate tracking. You're probably no stranger to tracking gizmos that rely on radio frequencies. From automated tollbooth transponders to auto-theft deterrent LoJack transceivers, the consumer applications are already making our lives easier. Now it's time for the corporate world to start reaping the rewards of this promising technology.

I realize that if I mention supply chain management that I will have lost you at ply, but this is where RFID will really make a killing at first. Walk with me over to your nearest Wal-Mart so I can show you. Imagine new shipments tagged with passive RFID tags. While it's not yet cost-effective to tag every individual item that will make it out to the floor, imagine a warehouse or stockroom where every box or pallet is tagged with a passive tag. Because they feed off the power of the wireless reader, they don't require batteries. Yet in an instant, inventory can be tabulated and every item in stock can be accounted for. So what does this mean for a company like Wal-Mart?

As a discount department store the retailer is already working lean. Its 22% showing in gross margins isn't going to win you over on its own. Yet by turning over its inventory quickly and effectively, Wal-Mart is able to achieve monster profits despite the meager markups. That's why the ability for Wal-Mart to have a system in place that is less labor-intensive yet more accurate will drive margins higher -- or drive sales higher if the company chooses to pass on those savings to the consumer.

So does that mean that retailers stand to benefit from the RFID boom? You bet, and it doesn't end there. From airlines tracking lost luggage to food service companies trimming spoilage costs by making sure that they move out dated inventory, the general operating economy of many different companies and sectors will improve dramatically. Yet while consumers will grow to appreciate the RFID advantage, investors should aim closer to the vest to cash in on the RFID revolution.

Companies with unique applications of RFID technology and those involved in printing the RFID labels offer the purest of plays. From Applied Digital (Nasdaq: ADSX  ) to Zebra Technologies (Nasdaq: ZBRA  ) , an alphabet of compelling equity situations awaits. While many are speculative and some will just flat-out fail, they are worth a closer look because RFID is here to stay, and those who ultimately matter in this field stand to collect some princely sums.

This week we will look at the printing side of the business. Next week we will look at the upstarts vying to capitalize on RFID in just about every other way. Why are we starting with the printers? That's easy. While wireless readers and scanners will obviously be a major part of the RFID experience, the process of laminating the microchips with tags on both sides is a perpetually disposable practice.

While a zebra's stripes may resemble a bar code, Zebra Technologies is all about RFID. Early to the printing game Zebra is already creating many of the traditional RFID tags as well as heading up lucrative initiatives such as placing RFID tags on medicine bottles to keep folks healthy and put malpractice attorneys out of work by making sure that patients get the pharmaceuticals that they require.

With $523 million -- or more than $7.00 a share -- in cash and short-term investments, the balance sheet isn't the only thing looking bright for the maker of RFID printers and printing supplies. Through the first nine months of the year the company's sales and earnings are up 25% and 31%, respectively. The company is guiding investors to expect $1.65 a share in earnings. That's a reasonable 31 times earnings -- or just 27 times earnings if you back out the company's cash to arrive at its enterprise value.

UNOVA (NYSE: UNA  ) , through its Intermec subsidiary, is another company that is well-entrenched in RFID. From its readers to its printing devices, the company's Intermec-related product and service revenues grew by 16% this past quarter.

But RFID is sure to draw the attention of other worthy players. Hewlett-Packard (NYSE: HPQ  ) is no stranger to the printing business, and it doesn't want to be left out of the fun. It is spending $150 million over the next five years on RFID technology.

So will the field get crowded? Perhaps, but not as crowded as the RFID chips themselves. That's just begging to become another microchip commodity niche and that's bad news for Texas Instruments (NYSE: TXN  ) , which has been dabbling in RFID for years.

Over the weekend I interviewed Kevin Ashton, co-founder of the Auto-ID Center initiative at MIT. The full transcript of Ashton's take on this booming industry will be made available to Rule Breakers newsletter subscribers in a few days. Yes, there is still time to sign up for a free trial.

But either way, slap an RFID tag on this site and make sure you come back next week as we will dig even deeper to separate hype from reality -- and the potential winners from the doomed losers.

Excited about the possibilities of being able to track things through radio frequency technology? Still not sure what RFID is all about and why you should care? All this and more -- in the RFID discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz isn't sure he would want an RFID chip implanted inside him, but he wouldn't mind never losing another sock again if his garments could get tagged. He does not own shares in any of the companies mentioned in this story. He is a member of theRule Breakersanalytical team, seeking out tomorrow's great growth stocks today.


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