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2 ways to buy into the ID chip boom
Chips used to track everything from products and animals to you could be the next big trend in technology. I.D. Systems and Digital Angel have important pieces of the emerging market.
By Michael Brush
Scan the papers these days and it's easy to get the impression that radio frequency identification (RFID) tags are little more than the latest example of an overhyped tech play.
But look beyond concerns about efforts by Wal-Mart Stores (WMT, news, msgs) to force suppliers to put RFID tags on goods for easier tracking, and you'll find plenty of other applications that'll help RFID suppliers.
Two good examples of RFID stocks:- I.D. Systems (IDSY, news, msgs). It keeps getting big upward earnings estimate revisions, which can be a sign of bigger growth to come.
- Digital Angel (DOC, news, msgs). The company could benefit from a greater need to track cattle with RFID chips because of fears about mad cow disease in North America.
The shares of both have been strong recently, but they're riding such powerful niche applications that they could still double in 18 months.
RFID is a system in which a small tag with an antenna communicates with sensors. RFID has been around for decades, and it's used all around you: in EZ Pass at tollbooths or in the keychain device that opens your car door. Here's a roundup of other applications that should help I.D. Systems and Digital Angel.
Fast-growing revenue
I.D. Systems will bring in only $13 million in revenue this year, but that could increase more than fivefold in the next 12 months. The company should grow rapidly because of how it's applying RFID in three areas.
The factory floor. Factories are filled with thousands of forklifts and other equipment that companies are paying too much to operate. I.D. Systems helps cut those costs in several ways.
For instance, Occupational Safety and Health Administration requirements say companies must make sure that only authorized drivers use forklifts, and that safety features like backup signals and hydraulic brakes are checked before each use. In a typical scenario, this means a supervisor walks a driver to a forklift and runs through the checklist.
I.D. Systems' Wireless Asset Net cuts down on the costs involved in two ways. First, a chip mounted on the vehicle automatically runs through the checklist. Then, the chip won't let anyone operate the vehicle unless they have the right access codes, which are embedded in another chip that operators wear. "So you are removing the manual component of checking the user in and running the diagnostics," says Scott Greiper, an analyst at C.E. Unterberg Towbin.
The system brings savings in other ways. Sensors constantly monitor for accidents, making drivers more accountable. And they clock real usage to schedule maintenance, instead of simply doing the works every month regardless of whether a vehicle needs it.
And by tracking a fleet, the system can tell managers if they have too many forklifts. "A company may have 300 forklifts but find that only 180 are ever used simultaneously," says I.D. Systems finance chief Ned Mavrommatis.
Big businesses such as Ford Motor Co. (F, news, msgs), DaimlerChrysler AG (DCX, news, msgs) and Target (TGT, news, msgs) have been experimenting with I.D. Systems gear. They like the millions of dollars in savings they get from it so much that they're coming back for more. Ford started off using the system in one plant and on 100 vehicles. It now covers 23 plants and over 3,000 vehicles, Mavrommatis says. Target and DaimlerChrysler are also expanding their use of this RFID system.
And I.D. Systems stock has been strong lately in anticipation of a decision by the U.S. Postal Service to broaden its use of the company's systems. A decision is expected by year-end. The contract could be worth as much as $45 million over a few years.
Tracking vehicles
Homeland security. At New Jersey's Newark Liberty International Airport, I.D. Systems tags are on fuel trucks and other airport vehicles. The tags control who can operate these vehicles. Sensors around the airport track the vehicles and shut them down if they stray beyond where they're supposed to be. (The system is also used at shipyards.)
Meantime, I.D. Systems recently hired Rick Muntz, who helped InVision Technologies (INVN, news, msgs) grab federal contracts for airport screening equipment. That might help speed up more airport contracts, says Bruce Vogenitz, who manages the The Henlopen Fund (HENLX, news, msgs), which holds I.D. Systems stock.
Rental cars. I.D. Systems RFID technology has also been put to work to speed up rental car returns at Avis in an experimental program in Puerto Rico. The chips more accurately measure fuel usage, adding an average of nearly $3 per car in fuel surcharges.
Avis has about 265,000 cars in its fleet nationwide. I.D. Systems' technology would cost about $250 to $300 per car. So a deal with Avis could potentially bring in more than $64 million. Will Avis sign on? I.D. Systems Chief Executive Jeffrey Jagid is careful not to make any predictions, but he expects a decision soon. (Avis declined to comment.)
"I can say with confidence that the car-rental industry will ultimately adopt this technology to automate their processes and optimize their fleet yield," Jagid says. "If you look at how compelling the data is, you would be pretty optimistic."
Unterberg Towbin's Greiper predicts I.D. Systems will take in $17 million in revenue next year. But deals from the post office and Avis in the coming months could blow those estimates right out of the water. "My numbers for next year could be off by 100%," says Greiper.
A cattle drive
Digital Angel should see healthy growth over the next two years from RFID applications in these areas.
Mad cow. In a mad cow scare, the key is to find any other cattle that may have eaten tainted food. Now, that's tough because of poor record keeping. RFID tags developed by Digital Angel could help health officials easily track cattle as they grow and move through the system. "The U.S. Department of Agriculture could press a button and instantly locate all the cattle associated with an event," says Digital Angel Chief Executive Kevin McGrath.
Both the United States and Canada are ramping up what will probably be mandatory RFID tracking systems for cattle, says David Talbot, portfolio manager at the Medical Performance Fund and HealthVest Advisors, which own shares in the company.
A look at the numbers shows the potential revenue growth. There are about 100 million cattle in the United States and about 40 million are slaughtered each year, says McGrath. The RFID chips will go for $1.25 to $1.50 each. That suggests annual revenue potential of $50 million to $60 million. RFID chips also will be used in Europe by 2008, and in Latin America in the next year or two, though no specific deadlines are in place. They also can be used in other animals like pigs.
Pet tracking. Digital Angel's HomeAgain ID chip for dogs and cats helps pet owners recover about 200 animals per day in the United States. The chip, about the size of a grain of rice, is marketed through veterinarians by Schering-Plough (SGP, news, msgs). Digital Angel hopes to boost sales by adding a feature that lets you monitor your pet's health by reading its body temperature with a scanner. It's not clear that dog owners will go for the added cost. But owners of more expensive animals like horses will recognize the value, McGrath said.
Under your skin
The human chip. The Food and Drug Administration last month approved Digital Angel's Verichip, a chip used inside humans to help emergency room staff identify potential problems like drug allergies. Verichip will be marketed by Applied Digital Solutions (ADSX, news, msgs), which owns 70% of Digital Angel shares.
Search and rescue beacons. Digital Angel also has a U.K. division called Signature Industries that sells search and rescue beacons used by military pilots. Though not an RFID application, these systems should see decent demand in the next two years as air forces upgrade to better gear. The Indian Air Force recently ordered new systems, and air forces in the United Kingdom and United States should place orders in the next two years, says McGrath.
Barry Sine, an analyst with HD Brous & Co. who recently started coverage of Digital Angel, thinks growth in these four areas could help the company earn 40 cents per share by 2006. Put a multiple of 25 times earnings on that, not unreasonable for a small-cap stock growing 40% a year, and you get a $10 stock some time next year.
Last week, chief executive McGrath bought $360,000 worth of his company's shares. That's a positive sign even if his finance chief cashed out $1.4 million worth by exercising stock options at $5.74 when the stock spiked and got ahead of itself last week.
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