Friday, December 10, 2004

RFID-Another POV

By Rick Aristotle Munarriz

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

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 the Rule Breakers analytical team,
seeking out tomorrow's great growth stocks today.

This Article is courtesy of Motley Fool Newsletter


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