For those interested in gaining exposure to the fast-growing navigation industry, I think NAVTEQ (NYSE:NVT) is one of the better ways to play the space.
NAVTEQ, founded in 1985 in Silicon Valley, provides digital mapping information for automotive navigation systems, mobile navigation devices, and Internet-based mapping applications. The company's main asset is its map database, which spanned 53 countries at the end of 2005, including all of the U.S, Canada, and Western Europe with the rest of the world actively being mapped out. Its maps are critical to automotive navigation systems, portable Personal Navigation Devices (PNDs), and mapping systems used on the Internet.
Operations and market exposure
Navigation systems for automobiles constitute NAVTEQ's current bread and butter, providing 70% of 2005 revenue. The company estimates that 10 million vehicles have been equipped with navigation systems employing its technology. It also stated that 18 billion online navigation requests used its database in 2005. Map your address on Yahoo! Maps or Mapquest, and the bottom right-hand quarter will denote a copyright from NAVTEQ. Non-auto customers include fleet-based entities, corporations, and government agencies with navigation needs. While the automobile market is becoming somewhat saturated and is expected to mature soon, the portable navigation, Internet, and non-auto markets represent future expansion avenues.
Competition
Other companies in the space include navigation device producer Garmin (NASDAQ:GRMN), which uses NAVTEQ in its devices. Garmin has done extremely well, but the hardware space is usually crowded and competitive in any industry. Choosing NAVTEQ here is like investing in Electronic Arts (NASDAQ:ERTS) instead of betting on the success of either Sony's Playstation or Microsoft's Xbox. Odds are better that any growth in the industry will flow through to NAVTEQ, no matter which hardware maker wins out.
NAVTEQ is the undisputed market leader in providing digital map information. As far as I have found, there is no true competitor; European-based Tele Atlas comes in a distant second. The business model is very compelling; once the initial investment of mapping an area has been made, the cost of selling that data via license fees is minimal. The company has already spent the bulk of the necessary capital to build its database, and for the last couple of years, it has begun to reap benefits with smaller maintenance and additive costs.
Investment merits
Other positive characteristics include a debt-free balance sheet, net margins in excess of 30%, and the generation of more consistent levels of cash flow from operations with minimal required levels of capital expenditure. Overall, the company is becoming increasingly profitable and growing rapidly.
Valuation
How much of that growth is already baked into the stock price? For NAVTEQ to be a successful investment, I estimate it will have to grow earnings 25% annually for the next five years, then spend the next 10 slowing down to a terminal growth rate of 3%. Since this is a riskier stock than most, I estimate a 15% discount rate -- my required rate of return to make an investment. I'll leave it up to you to determine your own degree of confidence that NAVTEQ will experience this level of growth. Since its sales have grown more than 40% annually over the past three to five years, its success is hardly out of the question.
Risks
Besides the growth needed to justify an investment, and concerns over how quickly consumers will take to PNDs, NAVTEQ faces other risks. To preserve its robust moat, NAVTEQ must protect and expand its database. In addition, the company just went public in 2004 and has only been profitable since 2002. The stock can be volatile; it dropped significantly following first-quarter results that were a bit light on the revenue side.
The Foolish bottom line
NAVTEQ has a number of very compelling investment merits, but there are definite potential drawbacks to consider, too. If you want to invest, I recommend using the stock's volatility to your advantage, by making a timely and measured entry when it happens to take a temporary plunge.
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Fool contributor Ryan Fuhrmann has no financial interest in any shares mentioned. Feel free to email him with feedback or to discuss the company further.
