Sales of car sat nav systems are booming; we focus on two UK firms that are benefiting from the craze.
Sales of sat nav units (satellite navigation) for car drivers are booming, and not just in the UK. Our friends at Fool.com are big fans of US sat nav manufacturer, Garmin
(NASDAQ: GMRN)
, and they also like Navteq
(NYSE: NVT)
, which provides digital maps for sat navs.
If you want to cash in on the boom, there are two UK-listed companies to consider: Trafficmaster
(LSE: TFC)
and Itis Holdings
(LSE: ITH)
. I outlined the basic differences between the two businesses last year; here's an update on how they've fared since then.
Itis
The beauty of this business is its simplicity. Itis obtains traffic information and then sends it to drivers via mobile phones or sat nav units. Itis supplies information to satnavs fitted in Toyotas, Fords and Mercedes amongst other makes.
Itis announced strong results in June, including a maiden full-year profit of £1.7m. It also generated operational cash flow of £1.8m. I expect profits to rise at a decent lick from here because most of the costs for the traffic information business are fixed. So as extra revenue comes in, most of the increase should fall through to the bottom line.
Itis is also expanding internationally. It's just licensed its software for the distribution of traffic information to an Australian company called InTelematics. No financial details have been released, but incremental costs should be on the low side and the gross margin should be high as a result.
Admittedly, the share price hasn't performed well since my last article. I think that's primarily due to problems at the company's CFVD (cellular floating vehicle data) business, which obtains traffic information by monitoring the movements of mobile phones. Revenue from a project with the Missouri state government has been delayed.
CEO Stuart Marks is confident that these delays can be overcome and he's also upbeat about growth potential at the core UK business. I rate Marks as a manager, so I take his confidence seriously.
Trafficmaster
Trafficmaster is a more complicated business, but still has virtues. Its most successful division is US business Teletrac, which tracks the movements of commercial vehicles for fleet managers. This business delivered an operating profit of £3.4m last year on sales of £20.6m.
Tony Eales, Trafficmaster's CEO, told me that he's confident that Teletrac can keep growing now it's attacking the long-haul fleet market as well as its traditional hunting ground of local US hauliers.
On the downside, the majority of Teletrac's customers lease units over a three-year contract term and Trafficmaster recognises 80% of the total contract value upfront, according to broker Bridgewell. That worries me a little as it means Teletrac has to sign up ever higher numbers of customers each year to keep the growth going.
Back in the UK, Trafficmaster sells its own sat nav hardware product, Smartnav and it also supplies traffic information to other companies' sat navs using the same basic technology as Itis.
Trafficmaster also provides a "Pay-as-you-drive" insurance service for Norwich Union. This enables the insurer to monitor the movements of drivers -- so if, for example, young drivers don't drive at night, they pay lower insurance premiums. Norwich Union has ordered 45,000 units so far from Trafficmaster.
So who wins the sat nav showdown?
Well, I own shares in Itis, and I still thinks it's the sat nav winner. I like the management, it's generating cash, and I'm excited about the Australia deal. I'm also reasonably confident that CFVD's teething problems in Missouri can be sorted out.
Broker Altium Securities has forecast earnings of 3p a share this year, which puts Itis on a price/earnings ratio of 15. That looks attractive to me.
But Trafficmaster is not a downtrodden loser anymore. Eales has done an impressive job turning things around since he became CEO. I particularly like pay-as-you-drive's potential and Teletrac appears to be prospering.
On the downside, the barriers to entry for rivals to Teletrac aren't high and the UK business needs to prove its problems are firmly in the past. Still, on a p/e of 10, Trafficmaster looks quite tempting.
Ed owns shares in Itis.
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