Jon D. Markman
Unova Still Looks Smart
By Jon D. Markman
RealMoney.com Contributor
9/8/2005 2:06 PM EDT
Unova (UNA:NYSE) BULLISH
Price: $33.48 | 52-Week Range: $13.59-$35.15
Unova has resolved a lengthy dispute over its radio frequency identification technology. That settlement has led to some important additions to its RFID licensing program, including Symbol Technologies and Avery Dennison. Shares are not cheap, but should move up to the mid-$40s or better by the end of next year.
One day not too long from now, everyday things around us will be as smart, if not smarter, than personal computers were in the 1980s -- which is to say about the intelligence level of your average 2-year-old. They'll be aware of their surroundings, and able to respond to people and other relevant things in ways that will seem like far-out sci-fi today.
One of the enabling technologies for thing-awareness will be a quirky wireless protocol, invented way back in the middle of the last century, called radio frequency identification, or RFID for short. And the reason that thing-consciousness is only just about to emerge is that companies and governments have now become aware of how much money it will save them, its building blocks are becoming truly affordable, and because a long-sought standard is finally settled.
I have written about RFID several times since 2003 -- notably here in a column in June 2003, when I suggested Unova (UNA:NYSE) as a way to play the technology when the stock was trading at $10.55, and I added the stock to the Value Investor model portfolio in June 2005 because it had emerged as the intellectual property leader in the sector. Although the company has gone through numerous twists and turns in its life, its right to wear the intellectual property crown was pretty much settled on Tuesday with the announcement that virtually all of its major peers have decided to license its patent portfolio. Shares shot up on the news, pushing Unova closer to fair value for now, but it seems likely that there is much more to come over the next few years. Shares were recently trading around $33.35.
As I wrote in the June newsletter, at one time IBM (IBM:NYSE) held a great many of the important RFID patents, but it sold them to a company called Intermec, which itself was subsequently bought by Unova, which was once a unit of defense conglomerate Litton Industries before being spun off. For years, Unova's attorneys have sought to cajole, plead or force other companies in the industry to license its patents on a royalty basis. It had sporadic success, but was kind of just paddling along until it came up with something like an amnesty plan. Unova's attorneys told other companies in the RFID area that, under what it called the Rapid Start Licensing program, it would take a somewhat reduced amount of money in royalties for its portfolio of 149 patents if the companies would conclude negotiations by Aug. 31 this year.
The RFID world was pretty much on pins and needles waiting to see whether industry giants would sign up. Unova shares got a big boost in June when Zebra Technologies (ZBRA:Nasdaq) signed on the dotted line. And yesterday, shares went into overdrive with the announcement of an impressive list that should certainly allow Unova to produce a strong royalty stream as adoption of the technology widens throughout the industry.
The most important new licenses are Symbol Technologies (SBL:NYSE) , which had fought Unova for years; ThingMagic, a powerful start-up out of the Massachusetts Institute of Technology; label giant Avery Dennison (AVY:NYSE) ; and some key semiconductor makers.
As I explained to my Value Investor readers, it's entirely possible -- though not a lock -- that Unova's patent portfolio could prove to be as important as the companies that hold the key intellectual property that make cellular services, such as code division multiple access, or CDMA, work.
Because the royalty stream will only become material next year, don't expect a ton out of Unova earnings in 2005. It will probably earn only around 67 cents a share, according to a Bear Stearns estimate. That should jump to $1.03 in 2006, and $1.39 in 2007. Does that make the stock super-cheap? No, not at all on a 12-month trailing basis, as the price/earnings multiple is around 40. But this is a forward-looking story, and I think Unova shares will move up to the mid-$40s or better by the end of next year as the story becomes better understood.
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