Innovate or Die: 3 Companies at the Cutting Edge in Scientific and Technical Instruments
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Companies making scientific and technical instruments have a combined market cap of $127.1 billion as of July 3. The large number of players in the industry and rapidly changing market dynamics call for continuous R&D and innovation. Rapid technological progress makes old products obsolete, and there is a steady stream of new ones to take their place. Here is a detailed analysis of the three leading players (among those listed on the NYSE and NASDAQ) in this industry in terms of market cap.
Riding high on automotive
According to an IHS forecast, global automotive production is expected to increase by 2% and by 5% year over year in 2013 and 2014, respectively. This production for the second quarter of 2013 is estimated to grow by 1% quarter over quarter and 3% year over year. That's particularly significant for Sensata Technologies (NYSE: ST), since 71% of the company’s overall revenue is driven by its automotive segment. That's much higher than its competitors, which derive 40% or less of their total revenue coming from their respective automotive segments. With growing demand for automotive production, this segment is expected to generate revenue of $1.658 billion in 2014 for Sensata. This is a compound annual growth rate (CAGR) of 9.8% over the 2012 figure.
Sensata's controls segment constitutes the other 29% of its overall revenue. The controls market is valued at around $3 billion and Sensata enjoys almost 20% of the market share. Sensata’s controls have applications in aircraft and home appliances.
U.S. appliance demand is influenced by the number of houses being constructed in the U.S., commonly referred to as housing starts. U.S. housing starts have grown steadily, almost doubling to 1 million in the last two years. Orders for aircraft have also increased, with Boeing’s aircraft deliveries expected to increase at a CAGR of 8% in the three-year period from 2012 to 2015. Sensata occupies over 90% of the controls market catering to commercial aircraft.
The growth in these two markets will influence growth in Sensata's controls segment. Sensata's controls segment had revenue of $538.7 million in 2012, and is expected to generate revenue of $585 million in 2014.
Flying into new horizons
Precision agriculture is a farming management concept which relies on advanced technologies. Precision agriculture products are among the highest-margin products for Trimble Navigation (NASDAQ: TRMB). The precision agriculture market has huge growth potential, according to a survey in May 2013 that found increasing adoption of intermediate and advanced precision agriculture technologies. Intermediate technologies consist of sprayer boom control and satellite imaging, while advanced technologies comprise telematics and decision-support systems. The percentage of customers using sprayer boom control increased from 39% in 2011 to 53% in 2013. The use of satellite imaging has increased to 40% in 2013, up from 31% in 2011. The greatest increase has been in the use of telematics and decision-support systems, which have grown from 9% in 2011 to 15% in 2013. This is compelling evidence for strong growth opportunity in Trimble’s agriculture business. As a result of this growth potential, Trimble’s field solution segment is estimated to yield revenue of $505.6 million, up 5% year over year.
Trimble has developed infrastructure for “big data” analytics with the help of acquisitions in the software solutions in the past. Recently, it acquired a portfolio of software solutions from Penmap.com; last year, it acquired the StruCad and StruEngineer businesses from AceCad Software. Big data allows companies to integrate field information and process it in the cloud to aid in decision-making. This in turn allows companies to drive higher margins in their software products. For Trimble, software subscriptions yield 70% gross margin, against 50% for the company's other products. With a market increasingly requiring big data analytics, incremental software revenue is expected to add 1% to the company's gross margin for Trimble per year, starting in 2014.
Beating peers with innovation
Garmin (NASDAQ: GRMN) launched Moterra in June 2013, an outdoor GPS device which, unlike many other GPS devices, runs Android apps. It facilitates easier navigation and runs on both rechargeable and single-use AA batteries, which is a boon for hikers, skiers and other adventurers. Moterra is scheduled to hit the market in the third quarter of this year, at a price of $649.99. This product will strengthen Garmin's outdoor segment, which also has products for hunters, golfers, and for applications like geocaching. This segment is expected to generate $435.9 million in revenue in 2013, up 8.5% year over year.
Garmin’s fitness segment generated revenue of $71.2 million in the first quarter of 2013 riding on strong demand for its Forerunner 10 and Forerunner 210 products. The company will likely launch a pedal-based power meter called Vector, a device that measures power data reliably and accurately for cyclists, in the third quarter of 2013. Garmin believes that this product will be highly successful with cyclists, and expects that Vector, along with its Forerunner 10 and Forerunner 210, will improve sales in its fitness segment. The fitness segment is forecast to generate revenue of around $368 million in the next year as compared to $321 million in the last year.
Sensata will benefit from potential growth in its automotive and controls segment.
Trimble has significant growth potential in precision agriculture products. Big data analytics infrastructure will help the company improve gross margins.
Moterra’s unique features will be beneficial to people engaging in adventurous activities. Vector is likely to expand Garmin’s addressable market.
All three stocks are a buy.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!