'Location 2.0' Stock Picks: NavTech, LoJack, TeleCommunications Systems

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Includes: LOJN, NVT, TSYS
by: Kishore Jethanandani

Location based services, such as a 3D map and traffic information, made a fitful start in the Internet bubble days. These services were not well received then because customers found mobile phones were too slow in displaying information from the Internet and that their screens were too small and the images blurry. Location based services have now gotten a break with the advent of smart phones, which have larger screens, higher resolution images and operate using broadband wireless networks, which enable faster downloads.

Increasingly, location based services mean more than a map and driving directions. NavTech (Nasdaq: NVT), for example, has a product, Discover Cities, which correlates location information with places of interest, such as shopping malls, gas stations, restaurants, businesses, parks, etc. Users of mobile phones can receive alerts about the source of the cheapest gas in their vicinity, discount offers when they are passing a mall, turn-by-turn routing directions to the nearest business or news about an event at the nearest theater.

NVT 1-yr chart

NVT

Vendors are finding new ways to make geographical information valuable for consumers and businesses. Companies like Inrix and traffic.com collect real time data from sensors or other means and feed them back to drivers, who view snapshots of the traffic situation visually displayed on maps and find the best means to navigate. Inrix also does forecasts of traffic volumes and helps drivers determine the time it would take them to move from one point to another.

The location based version of social networking helps mobile phone users locate friends and, by using services such as those provided by Loopt, Tourists can find information on events and look at reviews of restaurants and places of interest from other travelers.

Businesses use location based services to recover from disasters such as Katrina. Maptuit offers software that has helped retail giants like Wal-Mart reroute trucks to alternative distribution centers when storms like Katrina damage the normal destination points.

TeleCommunications Systems [TCS], Inc (Nasdaq: TSYS) provides the backend software and the data telecommunications service providers need to offer location based services. TCS’s software helps to pinpoint the co-ordinates of the location of a mobile device user when a 911 call is made. In addition, its Rand McNally Traffic application is a tool for navigation with turn-by-turn directions, which helps drivers to reach their destination. Users can also obtain real time information on traffic volumes on specific routes and places of interest on their route. TCS has a wealth of technology, 52 patents and 150 applications, which it can leverage.

Despite its strength in technology and marquee clients (Verizon (NYSE:VZ) with 20% of the sales and Cingular Wireless (NYSE:T) 10%), the financial performance of TCS thus far has been mediocre. Overall revenues barely grew from $97 million dollars in financial year 2004 to 102 million in 2005 and to 125 million in 2006. In all these years, it also incurred losses of $19 million in 2004, 12 million in 2005 and 22 million in 2006. It has since sold its enterprise applications division which accounted for losses of $24 million in 2006. The poor performance is accounted by the slow rate of adoption of location based services so far.

The prospects are likely to change in 2007 when adoption of location based services is expected to accelerate. In the first quarter ending 31st March 2007, TCS realized revenue of $34 million up 8% compared to 32 million in the first quarter of 2006. The discontinuation of unprofitable businesses in 2006 led to an increase in profits; net income in first quarter of 2007 was $0.6 million compared to a loss of $1.7 million in the first quarter of 2006. The improvement of profitability is reflected in a steady increase in stock price from a bottom of $2 in August of 2006 to a peak of $4.5 in May 2007. Further upside is likely with large sales of software to telecom carriers.

TSYS 1-yr chart

TSYS

LoJack Corporation (Nasdaq:LOJN) uses location technology to track down stolen vehicles and is extending its applications to cargo and laptops. It takes advantage of the tiny size of Radio Frequency Identification [RFID] to prevent a thief from finding the tracking sensor.

The current business model is looking to expand revenues by expanding markets in Canada, China and Italy. Increasingly, LoJack is also entering into bulk installation programs with lower per unit revenues, which accounted for 24% of all installations in financial year 2006. With bulk installations, LoJack is also looking to improve manufacturing efficiencies to maintain margins. After a 31% increase in revenues between 2004 and 2005, LoJack’s growth fell to a rate of 12% between 2005 and 2006. Net income peaked at $18 million in 2005 and then fell to $16 million in 2006. In the first quarter of 2007 ending 31st March, the revenue growth slowed further to 7% as compared to the first quarter of 2006. On the other hand, net income increased from $6 million up from $3 million. The higher profitability came from unchanged cost of goods while revenues increased. The stock price is up 20% YTD at 20.52. The stock is still below the 2 year high of 29 and is a buy.

LOJN 1-yr chart

LOJN