On the home audio side, Harman's smallest business by revenue, you can find everything from home theatre systems, to headphones, to premium loudspeakers and iPod speaker docks. What you shouldn't expect to find, though, is a cheap-o boombox to take down to the beach - Harman avoids the cutthroat competition that is a hallmark of the low-end audio market. They opt for the equiptment that you buy when you think of music as a religion.
Harman's second largest division, professional audio, sells just about everything you need to have a concert - save the band. This includes amplifiers, headphones, microphones, speakers and mixers.
And, of course, their most important division, automotive, sells the really slick equipment that's being built into a lot of high-end new cars such as in-vehicle video and GPS navigation systems as well as - you guessed it - premium speakers and audio systems. The primary customers of Harman's automotive division are the premium manufacturers like DaimlerChrysler, BMW, Audi, Porsche, Land Rover and Volvo.
There really is a lot to like about this company. From product mix to past performance to forward projections to price, it all seems to line up right now for Harman.
Product mix is a pretty key area to focus on as they predominantly sell into the auto market. In fact, 70% of their sales came from this market for their last fiscal year (ended 6/30/05). While this may give pause to some, it's worth reiterating that they are not selling to the US car manufacturers that have been very publicly suffering. They are selling, as mentioned above, to premium manufacturers, many of whom operate out of Europe. While General Motors Corp (NYSE:GM) and Ford Motor (NYSE:F) continue to struggle, guys like Porsche and BMW are not having nearly as tough of a time.
Even better than that is the fact that it's Harman's automotive division that is the rock star as far as operating performance. It blows both the consumer and professional divisions out of the water with a nice 16% operating margin versus 6% for consumer and 9% for professional.
The company's core is its R&D focus, and this keeps the company on the cutting edge in their markets. The newest thing in the pipe for Harman is called "infotainment" -- the combination of information delivery and entertainment. Harman's website describes infotainment as the following:
Harman Infotainment™ is the seamless integration of sophisticated information and entertainment systems. The brands of Harman International... have come together to develop this technology to provide users with a high-end graphic interface that combines a number of complex functions. These functions can include DVD navigation, e-mail, hands-free telephone, music, Internet access, voice activation, movies and much, much more. This wealth of convenience and innovation has the potential to vastly improve the quality of life, both on the road and in the home.
Of course, this isn't keeping them from continuing to innovate in their core multimedia systems. The following is from their first quarter conference call:
Within one year, we expect to unveil the most advanced multimedia system architecture for OEM and consumer applications this industry has seen. It will provide simultaneous and seamless transport of audio from hard disk, CD, and USB memory sticks from any computer to any other computer. It will accommodate several iPods, each playing music and displaying its playlist in less than one second. Similarly, the system will stream three DVDs across the network in real-time. We have conducted a series of exclusive presentations and focus groups to review and evaluate this new development. The unfailing reaction has been, “It knocked our socks off.”
With audio, information and multimedia systems in cars getting nothing but more complex, I like the leadership, entrenchment and innovation from Harman going forward.
For valuation, I basically used the company's top-line projections through '07 and assumed a 16% 5-year EPS growth rate (lower than analyst expectations) and did a quick and dirty analysis. What I came up with was that there is somewhere in the range of 40% upside to be had here. Right now, if you go with analysts' 21% growth estimate for Harman, they're trading at 21x their trailing twelve months EPS and have a 1.0x PEG ratio. At my estimate above, that would take it to a 30x multiple of trailing EPS and a 1.4x PEG.
I'm not going to try to pose here that Harman's poised to shoot up 40%. Heck, in the choppy market that we're in right now, it's going to be tough to figure out what in the world their stock price is going to do next. But what I do like here is that this is a solid growth company that has been beaten up without having seen any big hit to their business.
Over the next five years, this is a company that could see some really nice growth and this is a stock that you will probably not regret having in your portfolio.
HAR 1-yr chart: