Unova: Tobin's Top Pick

10/31/2003 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

There are few advisors who take as exciting an approach to long term investing as Tobin Smith. In his ChangeWave Investing, he looks for trends that like tidal waves, are unstoppable. I had the chance to have dinner with Tobin in San Francisco, and I couldn't help but ask for his favorite current stock. His response: Unova. (Note: the stock has since risen sharply and caution is suggested.)

"Here is the basic story: radio frequency identification (RFID) technology and electronic product coding systems use low-powered radio transmitters to 'read' information on a data chip. Passive chips can read within a range of 10 feet, while active tags have built-in mini-transmitters and can be read within a range of 300 to 400 feet. The data tags in each system store much more information than bar codes, and RFID systems can read cases stacked underneath one another on a pallet, making it easier to conduct an inventory than with a bar code system, which require line-of-sight bar code scanners. Almost any system where there is physical inventory or movement can be now be traced automatically without human interaction using RFID. If you use an EZ-Pass for toll paying, you know what RFID can do. Now consider its use in (a) truck, rail car, and container ship management; (b) pharmaceutical management; (c) retail inventory management; (d) access control; or (e) child or pet identification and you can see the uses are as limitless as your imagination. RFID devices will be used in libraries, hospitals, and almost every place imaginable where things move, or there are parts or inventory that needs to be tracked.

"Unova (UNA NYSE) is a billion-dollar manufacturing technology firm. The Intermec Technologies division of Unova does this; they are at the right place at the very right time in RFID history. Unova is poised to become a huge dealer in the race to get supply chains from Wal-Mart to the entire Defense Department up to speed over the next 12 months to include RFID systems.  We easily get to a $30 a share valuation for all of UNA. But if they have half a brain someone will talk them into spinning off their RFID systems business next year. The reason? When RFID mania starts to hit, pure play profitable integrators and systems companies will likely sell at premium p/e multiples. They absolutely would be nuts not to spin off this subsidiary to ride the RFID wave. Not to mention Intermec is a leading player in the public Wi-Fi systems space- more and more cities and restaurants are using providing Wi-Fi service to their citizens and patrons. But I'm not valuing their Wi-Fi business here at all. This is why though I consider UNA one of the greatest no-brainer investments I've ever seen .

"I also consider this play as part of a corporate strategic transformation, starting with a mandate from the world's largest retailer, Wal-Mart. Wal-Mart will bring its top suppliers to its headquarters in early November to fill in some details about its mandate to implement RFID tags for cases and pallets destined for the retailer's stores by January 2005. Wal-Mart wants its suppliers to be ready for RFID in 2006 and will have RFID readers in all its distribution centers, as well its more than 2,900 stores, by the 2005 deadline. Procter & Gamble says it will begin using RFID with Wal-Mart in major markets by next spring and Unilever says it will also meet the deadline. The goal is to track goods throughout the supply chain, from the time they're boxed at a manufacturing plant until consumers buy them.

"But the Wal-Mart mandate pales in comparison to the one from the Defense Department. The US Department of Defense will require all of its suppliers to use passive RFID tags on all cases and pallets by January 2005. The new policy will cover practically everything purchased by the US military--from beans to bullets and from toothpaste to tank parts, or roughly 45 million line items. Imagine the impact of this policy if it spreads to all the suppliers to the Defense Logistics Agency, which bought an estimated $24 billion worth of goods last year and has 23,642 suppliers. Combined with the Wal-Mart initiative, the Defense Department's plans should jump-start the RFID industry. The drive to adopt RFID in healthcare got a boost recently when an FDA task force issued a preliminary report that outlined ways technology can be used to make sure consumers get the medicines they need, rather than watered-down or repackaged rip-offs. The task force devoted a substantial portion of the report to the benefits of attaching EPC messages--96-bit product "license plates" that would identify a manufacturer, describe the type of product, and include a unique serial number--and RFID transmission microchips to pallets, cartons and products.

"Other than the Internet, I cannot think of a more basic transformational change in the economics and structure of our economy than RFID. Unova is one of the firms that sit in the catbird seat to ride this transformation into new sales growth for the forecastable future. I see a brighter future for UNA with earnings of 60 cents per share and up to $2 or more per share in free cash flow--maybe as much as $2.50. Since decent growth companies sell at 12-15 times free cash flow at least, we have a $30 stock here over the next 12-18 months. If UNA spins off the Intermec division, we literally have the opportunity for a 5-to-1 or 10-to-1 home run as RFID mania reaches Internet proportions and the 2005 deadlines draw near. Am I excited about UNA? To say 'yes' would be the understatement of the year. We're putting this one high on our buy list and recommend it as a must-own for ChangeWavers. Let's get into shares of Unova with a buy under of $18."

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