Remember the good ol' days when TVs and radios were crowned with those obnoxious rabbit ears? You'd twist and turn 'em, but to no avail; there'd be no reception. In the end, that important news announcement, once-in-a-lifetime historical event, or kick with seconds left on the clock was lost in the wind.
Antennas have come a long way since then, catapulting many industries, like autos, wireless communications, defense, travel, and even retail. In fact, those receptive wave collectors have affected just about every industry, and now antennas are playing an integral part in the promising new field of radio frequency identification (RFID) technology.
It's widely anticipated that RFID technology will revolutionize data capture beyond ubiquitous bar codes, dramatically changing the way information is collected and managed. With significant impacts expected on the efficiency of business processes, RFID wireless technology could reach an order of magnitude not seen since the inception of cell phones. Within the next few years, RFID is expected to play a major role in most supply chains, with the market projected to grow from $1.7 billion last year to nearly $6 billion in 2008.
So by now you may be asking, what is RFID? Quite simply, it is a way for companies to gather information on inventory in a matter of seconds, saving both time and money at key points along the supply chain. In 2002, it was estimated that U.S. companies, despite spending about $15 billion on supply chain software, had more than $1 trillion of inventory that sat idle at the end of the year.
Technically speaking, RFID technology utilizes "smart" labels, which contain information electronically embedded via microchips and antennas that activate the label. Readers activate the "smart" labels, turning transmitted radio waves into digital information that can be rapidly processed to simultaneously assess supply levels. Before RFID, most applications required near proximity to the product to gather needed product information, but with RFID, key information can be obtained quickly from a substantial distance. RFID applications can enhance logistics management, audit control, antitheft and brand protection, product visibility and ownership, and safe product handling. End users will be able to find, track, secure, and count items faster and more accurately, without having to scan those repetitive black lines.
With a bright future expected, powerhouses such as Zebra (NASDAQ:ZBRA) and Intermec, a Unova (NYSE:UNA) company, have been hard at work, putting major resources into the research and development of RFID applications. Intermec alone has filed more than 140 patents and expects to benefit nicely from RFID's rapid expansion. Suppliers such as Avery Dennison (NYSE:AVY) and Symbol Technologies (NYSE:SBL) have also shown great interest because the push to RFID could be quite lucrative for label makers. In addition, a recent consortium made up of around 20 key players in the field took place to move toward improving industry licensing and speeding up the adoption of RFID applications.
The largest RFID usage in the near term is expected to come from the labeling of cartons and pallets. Leading retailers, like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), and government agencies are urging their suppliers to implement RFID technology quickly, further reiterating the potential growth for this technology. Pharmaceutical companies have also shown interest with potentially increased product and consumer safety and tracking improvements.
With the rat race on, which companies are best positioned to capture a prominent niche of the swelling RFID market? Although I believe Intermec is going to be riding some serious income waves -- as no doubt it'll grab some pretty handsome licensing fees -- Avery Dennison is one of my favorites.
But with an active licensing environment and obvious competition, why Avery Dennison? Because RFID is going to need high-quality and high-quantity labels (tags) to allow for optimum performance. Avery Dennison, the inventor of the world's first self-adhesive label in 1935, has combined its expertise in leading innovative labeling solutions with RFID technologies. The company is at the forefront of RFID label technology, recently announcing the world's first high-volume Gen 2 RFID tag, AD-220 (licensed from Intermec; details on that cost were not disclosed). The AD-220 tag is produced using a unique manufacturing process that is up to 10 times faster than conventional production methods. This new process can improve tag reliability and will be needed to meet the demand for billions of RFID labels in the future. Bottom line: Avery Dennison's innovative approaches and expertise will combine nicely with RFID technologies.
While Avery Dennison remains committed to accelerating its top-line growth, it seems investors have tuned out its stock, because its shares are trading near 52-week lows. With concerns about soft market conditions garbling growth prospects, can Avery Dennison send an attractive signal to investors?
Investors have stuck with Avery Dennison's shares in the past, willing to pay a 20% premium over the S&P 500 price-to-earnings ratio. For the last 10 years, the stock has traded at an average low P/E of 16.9 and an average high P/E of 25.7. What does this mean? Probably not that much, because historical facts only demonstrate what investors were once willing to pay. But if history repeats, Avery Dennison's earnings per share (trailing 12 months) of $3.15 could lead to investors willing to pay anywhere from $53.24 to $80.95 per share in the near future.
But with sales expected to increase only marginally in 2005 and raw material costs making margins a bit stickier, a lower P/E may be realized. In addition, Avery Dennison is expected to pay antitrust fines issued by the European Commission, although they're likely to be trivial amounts -- and bottom lines will also be affected by increased pension and insurance expenditures as well as product development costs, with RFID development costs expected to double.
Looking at Avery Dennison's income statement, revenues have been growing steadily from around $3.8 billion in 2000 to about $5.4 billion last year. However, net income has been pretty flat -- hovering around $250 million per year for the last three years. In addition, Avery Dennison has produced $292 million in free cash flow for the trailing 12 months and, remarkably, has increased its dividend for 29 consecutive years -- the yield now is 2.9%.
Avery Dennison's most recent quarterly earnings statement hinted at signs of improvement. Profitably increased mainly because of improving operating and gross margins. Expected higher raw material costs -- which seem to be hitting everyone -- were overcome by increased selling prices. And the company is actively pursing opportunities to reduce costs as well as focusing on key growth drivers, such as RFID business expansion.
Now that you're gasping for air, the reality is that RFID is coming. And while cost concerns may keep bar codes in play, RFID players with innovative approaches will most likely succeed in capturing market share. It's a bit difficult to tell how the competitive landscape is going to shake out at this point, because there are quite a few players and a very active licensing environment. But I think that Avery Dennison's superior labeling solutions and RFID application advancements should be sending investors a clear signal.
Hoping to keep track of RFID?
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Fool contributor M.D. Mitchell is down the street at the local junkyard looking for some good trash. He thinks rabbit ears are useless but highly recommends rubbing a rabbit's foot every once in awhile. He owns none of the above companies. The Motley Fool is investors writing for investors.
