RFID: Symbol's Growth Engine?
By Stephanie Crane
Symbol Technologies, a maker of bar-code scanners, is one of several outfits focused on providing cost-effective radio frequency identification (RFID) products. We at Standard & Poor's Equity Research Services expect to see Symbol (SBL , ranked 3 STARS, or hold; recent price: $14) benefit from RFID, particularly as it already provides companies with extensive systems that are built on wireless local-area network (LAN) architectures using radio-based frequencies.
Symbol, which generated revenues of $1.5 billion in 2003, focuses on enabling data collection from a bar code via laser-scanning handheld devices. The captured data can be wirelessly transmitted from the device, which allows significant cost and time efficiencies in businesses' supply chain.
We see Symbol's development of RFID as an extension of its mobile enterprise systems. Deploying these readers to its existing customers would be a logical option and would give Symbol a competitive advantage over rivals. It's working on a prototype RFID reader that's designed as an extension of its handheld laser device, the MC 9000, which will ultimately allow dual use between RFID and bar-code scanning. We expect Symbol to offer an RFID product by yearend 2005.
DATA ON THE MOVE.
We see significant potential for Symbol and other tech outfits to reap large gains from the push to build RFID infrastructures in the supply chain, which means better tags (as RFID chips are called), advanced readers, and software and services will need to be developed. According to tech research firm IDC, RFID spending in the U.S. retail supply chain is expected to grow from $91.5 million in 2003 to almost $1.3 billion in 2008, representing a five-year compounded annual growth rate of 70%.
Spending on hardware alone, which includes tags and readers, should rise to $840 million, with a five-year growth rate of 66%. Symbol has said it won't get involved with tags as these will likely quickly become commoditized (see BW Online, 3/18/04, "Like It or Not, RFID Is Coming"). However, we see Symbol's focus on the readers as a significant opportunity to leverage its expertise.
RFID allows data that's stored in tags to be sent out via radio and captured by readers. This technology differs from the ubiquitous bar code (whose data is also read by a scanner) in that the reader can capture data from the RFID tag from a distance of up to 30 feet, even while the subject (which can include a car, runner, livestock, box, crate, shipping pallet) is mobile, cutting back on time spent manually inspecting the item.
DEADLINES FOR ADOPTION.
While RFID technology has been available for nearly two decades, costs associated with it have limited RFID to niche uses. Furthermore, no standards or significant initiatives toward wide-scale development and deployment had been set up to encourage mass adoption. Examples of niche applications include the use of E-Z Pass at highway toll stations in the Northeast, marathon runners' "Champion Chips" that record their start and finish times, paying for gasoline at the pump, monitoring felons' movements, and tracking livestock on the range.
As the retail industry and Defense Dept. seek to adopt RFID, several trends have surfaced recently to help push it more into the mainstream. Tag costs have come down -- now around 25 cents each, vs. $30 a few years ago. The EPC (electronic product code) global standard is defining tag specifications, and incorporation into the International Standards Organization (ISO) is the ultimate goal.
Most recently, Wal-Mart (WMT ) and Defense are requiring their suppliers to use RFID tags, enabling them to cut costs and boost efficiencies in the supply chain. Wal-Mart expects all its suppliers to use RFID tags by the end of 2006. Defense has set an end-2005 deadline for its 43,000 suppliers (which provide roughly 4.5 million items to the military) to have RFID tags on cases and pallets. Other retail giants interested in this technology include Target (TGT ) and supermarket chains Metro and Tesco in Europe.
Ideally, RFID would greatly enhance cost efficiencies in the supply chain by allowing data to be collected faster and in a more seamless way and cutting the need for manual information collection. The tags are placed on crates, shipping pallets, or even boxes, offering key details about the contents, including temperature, size, shape, quantity, age, and the time spent in the crate.
As the crate arrives at its destination (a warehouse or a loading dock at a port, for example), a wireless device -- called a reader -- would detect the crate's tag, collect the data, and log that information into the company's computer system. Theoretically, this would allow a business like Wal-Mart to keep its inventory up to date in real time, avoiding shortages, back orders, and waste, and enabling quality control, particularly for food products' freshness.
However, we see several obstacles to be overcome before RFID becomes mainstream. First, the technology still has some glitches, evident when attempting to read tags placed on metal containers or through liquids, experiencing read rates of 80% due to interference (from metal) or absorption (from liquids). Efforts are being made to solve these problems.
Suppliers need to see an attractive return on investment as they're pushed toward RFID. We believe that making it cost-efficient for them to use tags and integrate such data collection into their infrastructure would keep them from thwarting the adoption altogether. We expect to see tag costs reduced significantly -- from the current 25 cents to the industry's goal of 5 cents -- as volumes escalate, largely based on Wal-Mart's and the Pentagon's requirement for widespread RFID adoption. Furthermore, as the readers become more prevalent and competition among manufacturers escalates, the devices' cost could fall significantly from the current range of $500 to $1,000.
Privacy advocates are expressing significant concern surrounding the risk of consumer data and customer privacy infringement (see BW Online, 03/5/04, "Shutting Shopping Bags to Prying Eyes"). So far, the tagged data cannot be turned off after the consumer purchases an item and it leaves the store. But guidelines are being set with the EPC to determine how retailers use the data they collect and stipulate that they alert consumers.
Despite the promise of RFID, we have a hold recommendation on Symbol Technologies shares based on valuation and a longstanding and still-open Securities & Exchange Commission investigation, which is said to revolve around the company's accounting. However, other factors have dispelled somewhat the concerns over Symbol's shares, including recent management changes, as well as the filing of restated financial statements for 1998 through 2002 and the annual 10-K report for 2003.
LOOSENING PURSE STRINGS.
Our prior concerns over limited visibility into demand for wireless and mobile technology are also beginning to abate in light of early indications of spending growth in infrastructure technology, a trend that we believe should aid sales of Symbol's new bar-code-based products, expected in mid-2004.
Symbol shares are trading at 27 times our 2004 earnings-per-share estimate of 50 cents, still well above the S&P 500's p-e. Our 12-month target price is $17. We arrived at this by applying the outfit's historical average price-to-sales multiple of 2.5 to our 2004 sales estimate of $1.7 billion. Also in the mix was our intrinsic-value calculation using discounted-cash-flow analysis (based on a weighted average cost of capital of 11.63% and a 15-year terminal growth rate of 3%).
Note: Stephanie S. Crane has no stock ownership or financial interest in any of the companies in her coverage area. She's a registered representative of Standard & Poor's Securities, Inc. Other S&P affiliates may provide services to the companies under discussion.
Analyst Crane follows semiconductors, computer outsourcing, and other technology companies for Standard & Poor’s Equity Research Services