At the height of his fame, one of history's top investors,
Peter Lynch, regularly marveled at how often one good stock could
lead to another in the same industry. And that's just what
happened to me recently while reading up on one of my own
#-ad_banner-#This other "automobile stock" isn't a household
name like Toyota, but maybe it should be. It's up about 135% in
the past 12 months. And it still has plenty of attractive upside
left to offer.
One reason I believe this: The company has very robust sales,
which have been climbing more than 10% a year, from $2.9 billion
in 2009 to $4.3 billion last year. Also, the firm's earnings per
) growth has been rallying strongly since the nasty $7.19-a-share
loss of 2009, when the recession was really raging.
Now that the auto industry is on a roll again, consensus
estimates are for EPS to rise 24% a year to $6.63 in 2019 from
the current $2.26. However, this "auto stock" could earn $1,000 a
share and still never threaten Toyota's position as the world's
Indeed, the company hasn't sold one car in its 35-year
existence. That's because it doesn't make cars.
But I still consider it an auto stock. How can I not when it
generates three-quarters of its revenue from automakers?
You might be familiar with this company's products if you own
a Toyota. Many other major automakers buy from this company, too,
General Motors (NYSE:
Tata Motors (NYSE:
, among many others.
I'm referring to
Harman International Industries (NYSE:
, a leading provider of integrated "infotainment" systems to the
auto industry. These systems include things like audio, video,
wireless communication, navigation and Internet access. The
company also makes some of the more basic electronics typically
found in vehicles, such as lighting and climate control.
Harman owns a variety of brands including Becker, JBL,
Infinity, Harman Kardon, AKG Acoustics, Mark Levinson and others.
If a lot of these sound familiar, it's probably not only because
they're in many popular car models but because they're associated
with other Harman products outside the auto industry. These
products, which account for a quarter of annual sales, include
things like consumer and professional sound systems, guitar
accessories, microphones and headphones.
Harman International Industries is a leading
provider of integrated "infotainment" systems to the auto
industry, which include things like audio, video,
wireless communication, navigation and Internet
As I said, though, I consider Harman an automotive company
because that's mainly where its fortunes lie. In fact, the firm
has carved out a crucial role in the auto manufacturing process,
since its customers must design Harman's products into their
vehicles. This greatly helps in maintaining customer loyalty
because switching infotainment providers can be difficult,
especially once products have been designed in and manufacturing
Demand for Harman's existing lineup is likely to remain brisk
as the auto industry recovery continues, especially since the
company typically has long-term contracts with its customers.
There should be substantial growth opportunities with some newer
auto-related products, too. (My colleague David Sterman examined
Harman's place in the coming automobile technology
earlier this month.)
For example, early last month Harman introduced VoiceLogic, a
speech processor that improves voice quality in automobiles and
other noisy environments. The technology can obviously be applied
to hands-free communication devices in cars.
Also last month, Harman launched its Signal Doctor software,
to be incorporated into all new Harman-branded automotive audio
systems. As the name suggests, Signal Doctor restores the sound
quality of music compressed into an MP3 or streaming file format.
Compression can result in the loss of up to 90% of audio
Although I expect Harman will keep focusing mainly on the auto
industry, it won't neglect its non-auto-related business. One of
its latest products in this area is the Lexicon MC-14 Surround
Processor also introduced in early January. This technology is an
upgrade of the MC-12 platform, and it's designed to permit
high-quality audio and video in high-end home theaters and home
Risks to Consider:
Because of its recent run-up, HAR trades at a hefty premium,
as indicated by a price-to-earnings (P/E) ratio of 46. At such a
high valuation, the risk of a sharp price pullback is elevated.
As always, Harman must stay ahead of product trends or risk
Action to Take -->
Despite the high P/E, HAR is well worth considering. Based on EPS
growth projections, the stock could climb more than 90% during
the next five years -- and that's assuming a much lower P/E of
30, which compares favorably to its forward P/E of just over 19.
At the very least, I recommend investors keep it on their watch
lists and wait for a lower entry point. However, the stock has
considerable upside even for those who choose to buy at the
current price of around $103 a share. (Those who buy now can pick
up a slim 1.1% dividend yield for their trouble.)