Why You Should Consider This Audio Products Company
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Harman International (NYSE: HAR), the audio products maker, has experienced periods of rapid growth at times, while also facing significant challenges. An overview of the company through a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) can reveal to investors what to look for going forward. The S and W portions point out the internal factors affecting the company, while the O and T discussions illustrate the external climate.
1. Backlog of automotive-related orders:
As of March 31, Harman reported $15.7 billion in commitments for "Infotainment" and "Lifestyle" segment automotive system products. Its largest customers are BMW at 17%, followed by Audi/Volkswagen (13%) and Chrysler (8%) of total revenue. This leaves another 62% from additional customers, and Harman is regularly striking new agreements.
2. Improving operating margins:
Harman has pursued restructuring plans in the past that helped to stabilize profitability and position it for when demand turns positive. Currently, it is taking such measures as the sale of production facilities in higher-cost locales, targeting $30 million to $35 million in annual cost reductions beginning in 2014. Given that automobile sales continue to rebound, the streamlined cost structure ought to provide support to the bottom-line.
1. Volume declines from largest customer, BMW:
Harman's revenues from BMW have fallen of late, curbing overall revenues. The company's reliance on it, along with Audi/Volkswagen and Chrysler, adds some risk. A recent contract with Mercedes highlights how management is aiming to alleviate the impact of sales declines at BMW. It may also ramp up its level of business with the likes of Toyota/Lexus, Hyundai, and others.
2. Dependence on Europe:
Sales in the Infotainment and Lifestyle divisions are restrained by soft conditions in European economies at this time. Its Professional segment, serving stadium construction builders and pro musicians, has also felt a negative impact from the recession there.
Harman made its mark as a supplier to luxury European automakers, and will thus require a bounce-back in demand there to spur a notable profit improvement, in my view.
1. Growing foothold in emerging international markets:
The BRIC (Brazil, Russia, India, China) countries have become a focus of expansion, particularly with the Chinese automakers, for long-term agreements. In fact, management sees chances for growth in all three of its operating units through these channels. Should their economies continue to grow rapidly, it will be in good shape to benefit. Strategic bolt-on acquisitions may play a part in extending its presence in BRIC markets.
2. Growth from R&D investments:
In the first nine months of the fiscal year (ends June 30), Harman filed for a record 300 new patents. Technologies it is introducing include interactive/smart applications, high-speed networking and enhanced navigation features. Plus, Harman is launching new wireless speaker offerings and 3D navigation.
Another long-time player in the wireless speaker market, Plantronics (NYSE: PLT) is performing well and is on pace for strong earnings growth this year. Plantronics is primarily a manufacturer of lightweight headsets for the office/call center market, while it also serves the mobile and computing consumer-based sectors.
Growth is stemming from the economy and lower unemployment, as office occupancies are rising. Plus, Plantronics is experiencing heightened demand for mobile products. Management is pursuing a unified communications (UC) product strategy that is fueling sales growth. It also continues to be a beneficiary of the enactment of local hands-free driving laws, such as in China recently. The shares are a good momentum selection.
1. Mobile GPS systems:
Mobile navigation systems are increasingly utilized in place of embedded auto units. Harman would suffer if major customers choose to shift toward these offerings, unless it can gain substantial share in the mobile space.
One of these competitors in the mobile sector may be Trimble Navigation (NASDAQ: TRMB), a producer of GPS and wireless products with favorable earnings prospects.
Trimble's product lines, though, are geared more toward industry applications, such as engineering & construction and agriculture. Its strategy, the penetration of further customer markets for its products such as transportation/logistics and oil/gas, appears to be driving earnings growth.
Therefore, I like the stock based on the company's expansion initiatives, both internally and through acquisition. It is worth a glance for the near term or for more venturesome long-term portfolios.
2. A weakening of the euro currency:
We have seen it this year with companies that sell to Japanese manufacturers. A strengthening of the dollar against the home currency can put a damper on sales comparisons, as much of its sales are denominated in euros.
At this juncture, the positives appear to outweigh the negatives at Harman. The share price rise is indicative of these trends. Financial results might well accelerate positively. Over the long run, its forays into new avenues of expansion could be catalysts or deterrents (see Opportunities) for growth. Shareholders might well benefit but should anticipate choppiness in the price.
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