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The research team of The Manual of Ideas recently profiled a new holding of David Einhorn's Greenlight Capital. The analysis follows:

BUSINESS OVERVIEW

Harman International (NYSE:HAR) provides high fidelity audio products and electronic systems. The company operates in three segments: Automotive provides audio, electronic and infotainment systems to be installed as original equipment by auto makers. Consumer provides audio, video and electronics for home, mobile and multimedia. Products are sold through retailers such as Circuit City, Best Buy, MediaMarkt and Fnac. Professional provides loudspeakers and electronic systems used by audio professionals in concert halls, stadiums, airports, houses of worship, and theme attractions.

INVESTMENT HIGHLIGHTS

  • Owns renowned brands JBL, Infinity, Harman/ Kardon, Mark Levinson, and Becker. It is a leader in integrated infotainment for the auto industry.
  • Growth opportunities exist in all three segments: (1) automotive: potential to increase number of models offering Harman systems and to increase per-vehicle content of premium branded audio; (2) consumer: may benefit from convergence of home and multimedia technologies (offers branded accessories for iPod and iPhone); (3) professional: proprietary HiQnet system protocol incentivizes users to purchase complete compatible systems.
  • Targeting $400 million of annualized savings by FY11, of which $150 million have been realized. Total after-tax savings would amount to $4/share.
  • Mid-Infotainment system launch expected in fall 2009, ahead of original target. The company has been gaining share via new product introductions. China capacity has been doubled with a new plant.
  • Dinesh Paliwal (50) became chairman and CEO in July 2008. He was previously CEO of ABB North America. Herbert Parker (50) joined as CFO in June 2008. He was previously also at ABB N.A.
  • According to Greenlight Capital, Harman “could earn over $2 per share within the next couple of years, and much more in a normal environment.”
  • Shares trade at .3x LTM revenue, 1.3x tangible book.

INVESTMENT RISKS & CONCERNS

  • Weak end markets in CQ1 2009, with global, U.S., European and China/India auto production down 38%, 56%, 41%, and 17%, respectively. Consumer and professional markets are also weak.
  • Debt of $662 million, partially offset by cash of $334 million. Debt appears manageable, as earliest maturity not until the end of 2011. $400 million convert carries 1.25% coupon and matures in 2012.
  • Customer concentration. Daimler made a strategic decision in 2006-07 to move to dual sourcing, causing Harman’s share of Mercedes business to decline in FY08 and again in FY09. The business should stabilize at a “substantial” level in FY10.
  • CEO received total comp of $17 million in FY08.

MAJOR HOLDERS

Insiders 1% │ Cap Re 12% │ Cap World 9% │ Greenlight 6% │ Relational 6% │ T Rowe 6% │ Elm Ridge 3%

THE BOTTOM LINE

Harman occupies a strong competitive position in high-end audio products primarily for automotive applications. When the auto industry return to “normal,” Harman appears likely to reestablish profitability of several dollars per share. However, we view future earning power as too uncertain to warrant a meaningful multiple of projected earnings. We note that David Einhorn’s Greenlight Capital established its position at $11.07 per share, significantly below the recent market price.

SELECTED OPERATING DATA

FYE June 30

2006

2007

2008

YTD

3/31/09

% of revenue by segment:

Automotive

69%

70%

72%

70%

Professional

16%

16%

15%

16%

Consumer

15%

14%

13%

14%

Revenue growth by segment:

Automotive

5%

11%

19%

-28%

Professional

6%

8%

9%

-20%

Consumer

18%

1%

7%

-28%

Change in revenue

7%

9%

16%

-27%

Change in headcount

4%

4%

0%

-14%

EBIT margin by segment:

Automotive

15%

14%

5%

-4%

Professional

11%

14%

16%

12%

Consumer

10%

3%

-1%

-11%

Unallocated and other

-2%

-1%

-2%

-2%

Total EBIT margin

12%

11%

4%

-4%

Selected items as % of revenue:

Gross profit

35%

34%

27%

24%

SG&A

23%

23%

24%

28%

EBIT

12%

11%

3%

-19%

D&A

4%

4%

4%

5%

Capex

4%

5%

3%

3%

% of revenue by geography:

Germany

44%

45%

42%

n/a

Other Europe

18%

18%

16%

n/a

U.S.

22%

21%

23%

n/a

Other regions

17%

16%

18%

n/a

% of revenue by major customer:

Daimler and Chrysler 1

23%

23%

18%

16%

Audi / VW

9%

10%

11%

15%

BMW

10%

<10%

<10%

14%

Return on tangible equity

33%

32%

11%

-8%

Tang. equity to assets (avg)

41%

47%

44%

36%

Change in shares out (avg)

-1%

-1%

-6%

-6%

Source: Gridstone Research, Company filings, Manual of Ideas analysis.

1 Standalone Chrysler accounted for 7% of revenue YTD 3/31/09.

APPENDIX: OVERVIEW OF FACILITIES USED IN COURSE OF BUSINESS

Seg-

Size

Utilized

Location

ments1

(Sq. Ft.)

Util.

Sq. Ft.

Owned Properties – U.S.

Elkhart, IN

P

223,000

86%

191,780

Martinsville, IN

A

221,000

40%

88,400

Franklin, KY

A

152,000

96%

145,920

Washington, MO

A

101,000

100%

101,000

697,000

76%

527,100

Owned Properties – International

Suzhou, China

A

145,000

50%

72,500

Chateau du Loir, France

A, C

221,000

75%

165,750

Ittersbach, Germany

A

565,000

100%

565,000

Straubing, Germany

A

235,000

100%

235,000

Worth-Schaidt, Germany

A

204,000

100%

204,000

Szekesfehervar, Hungary

A

117,000

100%

117,000

1,487,000

91%

1,359,250

Total Owned Properties

2,184,000

86%

1,886,350

Leased Properties – U.S.

Moreno, CA

C, P

301,000

100%

301,000

Northridge, CA

A, C, P

589,000

82%

482,980

Rancho Cucamonga, CA

P

212,000

100%

212,000

Atlanta, GA

C

635,000

100%

635,000

Sandy, UT

P

127,000

100%

127,000

1,864,000

94%

1,757,980

Leased Properties – International

Vienna, Austria

P

193,000

100%

193,000

Juarez, Mexico

A

109,000

100%

109,000

Tijuana, Mexico

C, P

198,000

78%

154,440

Regensdorf, Switzerland

P

108,000

93%

100,440

Bridgend, U.K.

A

168,000

100%

168,000

Potters Bar, U.K.

P

160,000

100%

160,000
936,000

95%

884,880
Total Leased Properties 2,800,000 94% 2,642,860

Source: Harman 10-K, Manual of Ideas analysis.

1 A = automotive, C = consumer, P = professional.

Disclosure: No position.

Source: Harman International: Has David Einhorn's Thesis Already Played Out?