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RFID Supply Chain Software

By Daniel Thompson,2014-01-11 01:58
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RFID Supply Chain Software

    Supply Chain Software How to

    Make Money on RFID

    By Porter Stansberry

    Atlanta. Munich. Hong Kong… Management teams from the world's largest companies—Wal-

    Mart, Airbus, Boeing, Procter & Gamblehave been meeting in remote locales to hammer out

    one of the biggest technology changes businesses have ever seen.

    These corporations have been determining commercial standards for a new technology that's changing the way almost every business operates.

    The technology is called RFID. It was invented by the military 60 years ago to prevent "friendly fire" accidents. It was declassified in 1985. Since then, companies have been trying to use it to keep track of their inventory.

    At the end of last year, EPCglobal, a non-profit firm based in Brussels, announced one official standard for commercial use of RFID. This announcement echoed around the world just like when VCRs were introduced in 1976they generated $235 billion in 10 years. Or fax machines

    in 1984they generated $122 billion in 10 years.

    According to EPCglobal, RFID will become a $600 billion industry.

    Many companies will race to implement this new standard. They will spend a total of $4.6 billion per year by 2007, according to The Wall Street Journal.

    Already, Wal-Mart and the Department of Defense are taking the lead. Both started using this technology in early 2005.

    Barron's reported that 138 of Wal-Mart's suppliers have already committed to implementing RFID, no matter what it costs. Without it, they'll be out of business.

    In the coming months, these companies will be scrambling to stay in business with Wal-Mart and even the Department of Defense. To keep up with RFID they will spend billions of dollars over the next 5 years.

    That's one of the reasons why investing in the right RFID companies could mean huge profits for you.

    In this report, we'll detail:

    • What RFID is, and why the world's biggest retailers are rushing to implement it

    • An RFID Industry Overview: A Survey of the Competitive Landscape

    The 2 Best Investments You Could Make to Capitalize on the RFID Boom

    What is RFID?

    RFID, or Radio Frequency Identification, is, as the name suggests, a way to track objects by using radio waves. Though it promises to be a truly disruptive technologysomething that could

    quickly replace existing tracking systems and make sweeping changes through every single

    RFID found its first use over 60 years ago. industry

    During World War II, the British used primitive versions of RFID to tag their planes, in order to distinguish them from enemy Nazi aircraft. Today, businesses small and large, the U.S. military, and thousands of others use RFID for tracking everything from livestock and priceless paintings to beer kegs and army tanks.

    Without getting into any of the complex engineering involved, here's the simple explanation of what RFID is…

    RFID, just like any other technology, can be looked at in terms of software and hardware (more on this later). You can break down RFID hardware into two parts: the RFID tag and the reader. The tag is a microchip that holds information about the item it's tracking (origin, destination, expiration dateif there is oneand other product details).

    This little chip can hold about 2 KB of informationabout the size of a half page email.

    Connected to this chip is a miniature antenna, which allows the information that's stored in the chip to be received by an RFID reader via radio waves.

    This technology threatens to change the way business is done. In fact, you're probably already using it, or are at least exposed to it in some way. If you have keyless entry to your car, or an Exxon Speedpass, you already use RFID. Perhaps you've heard of FasTrak or EZPass, which

    let you pay your toll on the highway without stopping. They use RFID technology too.

    RFID is going mainstream, so to speak. With the recent announcement by EPCglobal, a standard is now in place that will effectively commercialize RFID for the retail environment. Not surprisingly, the world's largest corporation is leading the charge.

    Why RFID Will Become a Multibillion Dollar Industry

    RFID has the potential to save retailers billions through more efficient management of inventory and human capital.

    Some retailers already use RFID, but at this point they can only track products they manufacture in-houseitems that will never leave the store.

    A LESSON IN DISRUPTIVE

    TECHNOLOGY

    From cradle to grave.

    For instance, company X might use RFID to That was the focus of SPEC 2000an initiative track bars of soap in the their own store, by the aviation industry to track airplane parts provided they make the bars of soap from the moment they were manufactured to themselves. But what if company X orders the day they were disposed of and beyond. Part towels made by company Y? Company Y tracking is critical in the aviation industry for might use RFID too, but chances are good obvious reasonsyou don't want worn out they don't follow the same RFID standards as parts making their way back on to commercial Company X. Therefore company X can't use airliners, and you certainly don't want to use RFID to track their expected shipment of counterfeit parts, which is a surprisingly large towels. problem in the commercial air business. SPEC

    2000 required all parts suppliers to place a two-

    dimensional barcode on all major components, Getting raw materials onto the sales floor is

    providing data about the complete history of the one of the hardest and most expensive

    component. Some parts could simply be aspects of manufacturing distribution and sales.

    barcoded with an adhesive label, while others Think about it: You can outsource labor to

    used high-quality ink jet markings. Dot peening China, you can buy real estate in bad

    of some components was another technique neighborhoods, and you can invest in vastly

    that was employed, so was laser markingcheaper communications technology… but

    arguably the best alternative of the bunch. before RFID there hasn't been a way to greatly

    Lasers were a tough sell initially for reduce the cost of maintaining inventory.

    manufacturers, based partly on the upfront cost of systems, but also because companies One of the things about RFID that has retailers (especially engine suppliers) were leery of so excited is everything is hands off. RFID can using lasers to mark highly stressed, flight-scan automatically whole shopping carts full of critical components. products, and just as easily an entire

    warehouse full of inventory. The RFID reader

    Industrial laser companies have benefited from instantly receives information about everything

    increased demand for laser marking systems in that it just scanned, which then goes to a

    aviation, as well as automotive and marine computer that analyzes the information.

    applications. However, a new technology threatens to leapfrog 2D laser barcodingFewer human resources are necessary. You RFID. won't have some overworked cashier straining

    to flatten out a barcode. Whereas barcodes

    In early June of this year, Delta and Boeing use UPC (Universal Product Code) to identify

    announced plans to start testing the use of products, RFID uses EPC (Electronic Product

    RFID tags on engine parts. This was widely Code), which is far more specific. RFID

    seen as the first significant test that could open recognizes each roll of paper towels it scans

    the floodgates for RFID acceptance in the as different from every preceding and

    aviation industry. successive roll, while barcodes recognize

    paper towels simply as a class of product.

    Both Boeing and its closest competitor, Airbus, are pooling efforts to develop RFID standards This comparison touches upon why RFID has

    for the entire industry. The two companies have the potential to generate incredible profits for

    hosted the first in a series Global Aviation RFID companies that utilize the tracking technology,

    Forums in Atlanta to begin the work of for companies that provide the technology, and

    hammering out acceptable standards. Boeing's for people who invest in these companies. A

    management estimates that their company and similar occurrence happened with barcodes in

    Airbus share about 70% of common airplane 1984, when Wal-Mart told its suppliers they

    components. RFID technology could really help had to use them, which resulted in tripling Wal-

    the airlines by reducing inventories, which can Mart's profitability.

    run as high as $1 billion. For airlines, cost reduction is the main attraction of RFID Today, over 10 billion barcodes are scanned adoption, but there are the added safety every day. Imagine if you earned a penny benefits that accompany the technology. every time someone used a barcode. Even a

    fraction of a penny and you'd be very wealthy.

    The leapfrog effect will likely carry over to many

    industries. While the auto industry is a likely user, the pharmaceutical industry already plans to use the technology to combat counterfeit therapeutics. NATO and the Defense Department have RFID mandates in place right now.

That kind of opportunity exists with RFID, which will not replace immediately the barcodethe

    but it is the heir apparent. two will coexist for a while at least

    Right now, many of the biggest companies in the world are using, or exploring the potential of RFID: Ford, Avis, Boeing, Coors Brewing Company, Target, Metro (the largest German retailer), and Tesco, the largest retailer in the United Kingdom.

    As I mentioned, the largest retailer in the United States, and in the world for that matterWal-

    Martis pushing forward with a timetable for the rollout of RFID. In June 2004, at a retail industry conference in Chicago, Wal-Mart announced they'd require their top 100 suppliers to use RFID by January 2005.

    Why so soon? Wal-Mart has billions upon billions of items to track. That's why Yankee Group Consulting expects Wal-Mart to spend between $515 million and $3.8 billion on it this year alone. With RFID tags on the inventory, Wal-Mart will know exactly where their entire stock is all the time.

    For Wal-Mart, and other retailers, this is the key to big profits because it allows them to avoid overstock and understock, which squander revenues and potential profits. For instance, they'd like to keep their 2,322 stores worldwide fully stocked with backpacks when kids are going back to school. Similarly, they need to know to remove displays of backpacks when the back-to-school rush has subsided. It's a matter of efficiency.

    RFID could help Wal-Mart triple profits over the next ten years because they'll be able to locate inventory instantly. EPCglobal, the governing body for commercializing this technology, recently published a supply chain study, which shows the ways that RFID could save retailers money:

    1) No more misplaced stock. Stores lose 4% of their sales per day because 8%-10% of their stock is in the wrong place.

    2) No more shoplifting or lost perishables, which costs stores over $500 billion per year. 3) No more counterfeit products. Currently 30% of the $50 billion spent on prescription drugs per year is spent on counterfeits.

    4) 20% less warehouse staff. With RFID, most inventory tasks would be automated.

    But that's just the beginning. AMR Research in Boston published a study determining that RFID tracking could help stores cut inventory by 25%, saving $6.7 billion annually, while at the same time increasing sales by 3%-4%, which translates into $10.4 billion per year.

    Wal-Mart's 10,000 suppliers aren't the only ones making the move to RFID. The Department of Defense has also mandated its 43,000 suppliers be RFID ready in 2005.

    With over 50,000 suppliers committed to using RFID, the opportunity to make money on it is huge, both for RFID technology providers and investors in those companies.

    The Major Players

    There's a lot more to the burgeoning RFID industry than companies that make tags and readers… For instance, this new market has given rise to competition among silicon providers, as well as companies that make label converters, printer-encoders, and label applicators, each of which is vital to RFID.

    Take a look at the sidebar below. It's a list of publicly traded companies that stand to benefit from the agreement on common RFID standards. The list is comprehensive and vast, including companies that specialize in consulting/systems integration, logistics, web services, application

    software, packaging, in addition to the companies that focus on providing technology more directly related to RFID.

    So, this begs the question: With all of these companies vying for a piece of the projected multibillion dollar RFID market, which is the best way for you to find profits as an investor?

    It's best to divide the list into hardware and software companies. Hardware companies make the physical partsthe antennas, the readers, the nuts and bolts of RFID. Last June, the equity research firm Bear Stearns issued a report explaining that 58 companies are competing for the contracts to make RFID tags and readers. Some of these companies have already achieved a level of success in supplying readers and printers for bar codes. The question is whether they can take advantage of existing client bases and successfully transfer their expertise in this closely related field of technology to RFID.

    For all of these companies (and for investors putting money in them), the risks are high.

    Many of them won't make the first cut. Now that the global standards for RFID have been announced, anywhere from two to eight companies will be poised to compete. The competition in hardware gets even riskier when you consider the current patent disputes between them. In the last four years, 776 new patents have been awarded. The lawsuits have already started.

    Competitive LandscapeRFID

    Accenture (ACN) Oracle (ORCL)

    Atmel (ATML) Paxar (PXR)

    Avery Dennison (AVY) Philips (PHG)

    BearingPoint (BE) Printronix (PTNX)

    Capgemini (CAPP.PA) Progress Software (PRGS)

    Checkpoint Systems (CKP) Retek (RETK)

    Danaher (DHR) SAMSys (SMY.TO)

    DHL (DPWGN.DE) SAP (SAP)

    Domino Amjet (DNO.LN) Sapient (SAPE)

    EM Micro-Marin (UHR) SATO America (M6287)

    Exel (EXL.L) SeeBeyond Technology (SBYN)

    Escort Memory Systems (DAL.IM) SIRIT (SI.TO)

    Fedex (FDX) Smurfit-Stone (SSCC)

    Georgia-Pacific (GP) STMicroelectronics (STM)

    Hewlett Packard (HPQ) Sun Microsystems (SUNW)

    High Jump (MMM) Symbol Technology (SBL)

    I2 Technologies (ITWO) Texas Instruments (TXN)

    IBM Global Services (IBM) Tibbett & Britten (TBG)

    IconNicholson (ICON.SS) TIBCO Software (TIBX)

    Intermec Technologies (UNA) Tyco Sensormatic (TYC)

    International Paper (IP) UPM Rafsec (UPM)

    JDA Software (JDAS) UPS (UPS)

    LXE (Div of EMS Tech) (ELMG) UTI (UTIW)

    Manhattan Associates (MANH) VeriSign (VRSN)

    Manugistics (MANU) webMethods (WEBM)

    MeadWestvaco (MWV) Weyerhauser (WY)

    Menlo Worldwide (CNF) WJ Communications (WJCI)

    Microsoft (MSFT) Zebra Technology (ZBRA)

    Moore Wallace (RRD)

    *List courtesy of Bear Stearns

    Ways to Win in RFID

    As mentioned earlier, there are three ways to invest directly in the upcoming wave of RFID adoption. You can invest on the hardware side these are the companies that actually produce

    the RFID tags, and their associated readers. You can invest in the RFID software producers that write the applications and web-based utilities that provide access to the data transmitted by the tags. The last way to play this space is the services and consulting side, which, for the most part, does not offer much of a pure-play on this nascent technology.

    We have chosen to focus on two of the software providers that we think are most likely to split the largest slice of the RFID retail software pie in the next few yearsRetek Incorporated and JDA

    Software Group.

    THE TWO BEST PLAYS IN RFID-ENABLED SOFTWARE PROVIDERS

    Retek is a software company that offers an invaluable array of Internet-based applications specifically for retailers, like Best Buy, Eckerd Drug, and Home Shopping Network. The company' s biggest customertheir only 10%-plus buyerlast year was clothing retailer Gap (NYSE: GPS).

    Retek's software is not just for big-box retailers, but also Internet e-retailers as well.

    The company's software products support virtually all of the operations conducted by major retailers and fall into five primary groups: planning, optimization, inventory replenishment, merchandise operations management, and supply chain management. When used together, Retek' s software allows retailers to monitor the products they have on hand, plan on the replenishment of goods that are sold, optimize product mix for profit maximization, and keep the flow of inventory from suppliers at ideal levels. Retek' s capabilities enter a new phase with RFID technology, where the possibilities are truly endless. Grocery stores, for example, could remotely monitor the expiration dates of their entire inventoryremotely and in real-time. They could also

    conceivably read data from the RFID chips that would indicate whether or not individual quarts of milk maintained proper temperature during transit. Clothing retailers would not only be able to monitor overall levels of dress shirts in inventory, but they would also be able to tell the sizes, colors, and stylesand the software would assist in planning based on that data.

    RFID technology has the capability of generating true incremental economic value for its users through cost savings and optimal inventory management.

    JDA Software is another major player in this space. It, like Retek, designs demand and supply chain management software and applications for optimization, planning, and forecasting. While it' s frequently contentious to say that two companies do largely the same thing, it is fair to say that

    JDA' s offerings address many of the same needs for retailers as does Retek. In fact, we have seen several customer implementations that use a mix of JDA and Retek applications. These two companies are the leaders in the retail space, while competitors SAP, i2 Technologies, and Manugistics focus on a wide range of industry supply/demand solutions. RFID stands to increase the effectiveness of the products of all these companies, but JDA and Retek are compelling pure plays on the technology.

    Let' s now take a look at each of these companies from a financial perspective:

    At the end of the company's December 2004 quarter, Retek had $41.6 million in cash and zero long-term debt. While we are aware of the virtues of an optimal mix of both debt and equity on the balance sheet, we are fans of companies that have no debt in their capital structure. Annual sales growth since the company went public in 1999 has been somewhat inconsistent, owing in most part to a slowing economy in 2002 that made retailers balk at large capital expenditures. We expect Retek' s 2005 to outpace its 2004 fiscal year from both a revenue and earnings perspective, despite the sense that conservatism in capital spending by retailers remains a speed bump for the company.

Retek's shares are very cheap at the moment. From an historical valuation perspective, RETK

    shares are trading at a deep discount to its typical average levels. Over its public life, they typically hover at 10.5x book value and 13.8x sales. Currently, the company's shares are at 3.5x book and 1.9x sales. While the company is profitable now, there isn' t enough data to generate an earnings multiple. However, based on the price to book and price to sales ratios, we think that RETK shares are cheap at current levels, and should see a return to historical averages, especially as second generation RFID technology is adopted and suppliers begin to comply with big box retailer and DoD mandates.

    Our discounted cash flow valuation of RETK shares tells us that they are fairly valued at current levels based on the company' s negative, but higher-than industry-average operating profit levels, and cautious 1Q05 guidance. If we see $5 a share we will need to see organic growth in the next few years average in the low- to mid-20% range and operating margins begin to reflect RETK' s dominant position within its space. We expect capex and changes in working capital to grow in-line with company historical averagesthus not being too much of a roadblock to higher share

    valuations. Again, the company is comfortably capitalized with about $92 million in cash and securities on the books, and has no long-term debt.

    JDA Software, like Retek, is well capitalized with $72 million in cash with no long-term debt. Its shares are trading at 1.3x book, 1.6x sales, and 14.7x cash flow. From a book perspective, current levels are at the basement of its historic yearly averages. The same goes for price to sales. On a cash flow basis, shares only ever traded at a lower multiple in the capex-constrained year of 2002. JDAS shares are trading at an admittedly high earnings multiple as deteriorating operating margins gave way to poor earnings. The important thing with JDA (and Retek) is that investors are not likely to get pummeled at these depressed levels.

    Both companies' shares are undervalued at today' s levels if both JDAS and RETK develop into what we expectthe two dominant players in retail RFID software. If these two split the lion's share of the retail RFID market, we will have several years of growth far greater than low double-digit rates off their relatively small current revenue bases. As a result, if RFID takes hold, we will be looking at valuations for both stocks well north of the levels we trade today.

    While both of these companies have sold off in recent months, our valuation work shows that a combination of their dominance of the retail supply/demand management software space, a new round of RFID spending on Generation 2, and large retailer and defense related mandates are likely to take RFID related stocks north of current valuations. For these two retail oriented stocks, in particular, we believe they have not priced in the size of the new expanded marketplace for RFID technology because product-level tagging is still probably 12 months away.

    We would buy RETK shares up to $10 (currently $6.09) and JDAS shares up to $15 (currently $11.65). Use a 25% trailing stop on each and limit your total investment on each stock to no more than 4% of your total portfolio.

    Comparative Valuation: RFID Software Providers

    10 Year 1999 2000 2001 2002 2003 TTM Average

RETEK (Nastaq: RETK)

    Price/Earnings --- --- --- --- --- --- --- Price/Book 28.2x 9.4x 7.6x 1.4x 5.7x 3.6x 10.5x Price/Sales 44.4x 12.5 8.3x 0.7x 3.0x 2.0x 13.8x Price/Cash Flow --- --- 63.2x --- --- --- 63.2x

JDA Software Group (Nasdaq: JDAS)

    Price/Earnings --- 37.3x 60.4x 31.2x --- --- 42.0x Price/Book 2.2x 1.7x 2.7x 1.1x 1.8x 1.4x 3.2x Price/Sales 2.7x 1.9x 2.8x 1.3x 2.3x 1.8x 3.1x Price/Cash Flow 29.5x 37.5x 20.8x 6.8x 23.1x 16.7x 27.6x

Manugistics Group (Nasdaq: MANU)

    Price/Earnings --- --- --- --- --- --- 51.3x Price/Book 2.5x 18.5x 4.4x 2.4x 1.0x 1.2x 5.3x Price/Sales 1.2x 10.2x 6.8x 2.8x 0.6x 1.1x 3.9x Price/Cash Flow --- 127.5x 117.8x --- --- --- 56.0x

Manhattan Associates (Nasdaq: MANH)

    Price/Earnings --- 80.4x 55.0x 28.6x 38.9x 32.1x 59.4x Price/Book 3.1x 10.3x 5.7x 3.7x 3.6x 2.9x 6.4x Price/Sales 2.4x 9.8x 5.9x 4.1x 4.3x 3.5x 6.3x Price/Cash Flow 17.0x 35.7x 22.8x 15.7x 23.5x 19.5x 22.9x Source: Morningstar, Inc.

     ALL CONTENTS OF THIS LETTER ARE COPYRIGHT 2005 BY STANSBERRY & ASSOCIATES INVESTMENT RESEARCH. ALL RIGHTS RESERVED: REPRODUCING ANY PART OF THIS DOCUMENT IS PROHIBITED WITHOUT THE EXPRESS WRITTEN CONSENT OF STANSBERRY & ASSOCIATES INVESTMENT RESEARCH. Protected by U.S. Copyright Law {Title 17 U.S.C. Section 101 et seq., Title 18 U.S.C. Section 2319}: Infringements can be punishable by up to 5 years in prison and $250,000 in fines.

    LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what we've learned as financial journalists. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. Stansberry and Associates Investment Research expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. And all Stansberry & Associates Investment Research (and affiliated companies) employees and agents must wait 24 hours after an initial trade recommendation is published on the Internet, or 72 hours after a direct mail publication is sent, before acting on that recommendation.

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