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Published: May 7, 2010
Don't look now, but radio frequency
identification (RFID) chips are all around you. They’re used in
toll booths, at the gas pump, in retail stores and on the farm
to keep track of animals. They even allow store managers to
change the price of a product on the shelf with the mere press
of a button. In the aviation field, they’re used to track
aircraft parts and passenger bags.
Worldwide sales of RFID-related technology hit $5.4 billion in
2009, up from about $4.7 billion in 2008, according to ABI
Research, a consulting firm in Oyster Bay, N.Y. ABI expects
worldwide annual RFID revenues to grow +12% a year through 2014.
The use of RFID tags for highly precise tracking in supply
chains is crossing over from the consumer world to emerge as a
mainstream technology in the aviation sector.
Following the path of major retailers such as Wal-Mart (NYSE:
WMT), the aviation field is embracing RFID, a
“paradigm-shifting” innovation that is generating operational
efficiencies and enhancing security within major airports and
aviation supply chains.
Simply put, RFID tags automatically identify a “tagged” object
or person by storing and remotely retrieving information from
small transponders, or tags. Each tag features a built-in
antenna that allows for the transmission and reception of radio
waves from an RFID transceiver. As the tags get smaller, the
most sophisticated manufacturers of them, notably Avery
Dennison Corp. (NYSE: AVY), are adding increased
capabilities for greater accuracy.
Pasadena, Calif.-based Avery Dennison is the smartest investment
play in the RFID field. Avery Dennison makes a wide variety of
information and brand management RFID tags that include graphic
tags and labels, variable data tags, printed fabric labels, and
heat transfers.
In 2004, this old-line company foresaw the rapid growth of RFID
applications and created a special division dedicated to the
manufacturing and marketing of the product. The RFID division
now is the fastest growing at the firm, exceeding $50 million a
year in sales in 2009. That’s still a small portion of the
company’s $6.7 billion in annual sales, but the upside is huge,
given the company’s foothold in superior RFID technology,
combined with its longtime supply chain expertise and recent
inroads in aviation.
Avery Dennison’s RFID division also has its own dedicated R&D
unit with its own staff, distinct from the rest of the company’s
other groups. Company executives assert that RFID represents
Avery Dennison’s single largest long-term growth opportunity.
Aviation-fueled demand for RFID tags will be a shot in the arm
for Avery Dennison, which during the recent economic downturn
has experienced weak sales for its core business of pressure
sensitive labels and other conventional office products.
The stock has taken a beating lately,
largely because of last year’s slump in retail sales, but with a
price-to-earnings ratio (P/E) of 19.8 it’s now a bargain
compared with its peers, and it’s poised to reap the benefits of
the built-in future demand for RFID.
During the recession of 2009, the company’s
earnings per share (EPS) dropped from $3.30 to $1.97.
However, 2010 is heralding a recovery, for the economy in
general and aviation in particular. EPS estimates for 2010 range
from $2.50 to $2.65; for 2011 the consensus is $3.00 per share
The bulk of the company’s RFID business is spread throughout the
consumer, retail, automotive and pharmaceutical industries, but
its presence in aviation is growing. The company’s RFID
technology is superior to that of its competitors because its
RFID tags can read at any angle to produce better read capture
rates in baggage applications, where there is little control of
the physical orientation of a passenger’s bag.
Avery Dennison scored a coup last year, when it was chosen to
supply Hong Kong International Airport with up to 70 million
RFID-enabled baggage-tracking tags. Hong Kong’s airport is one
of the first to adopt RFID technology; it will use Avery
Dennison’s new RFID tags that are specifically designed around
aviation needs, for the 40 million passengers that pass through
its terminals every year.
According to the International Air Transport Association (IATA),
the major airline trade group, RFID bag tags will save the
aviation industry over $700 million a year. Officials at Avery’s
client, Hong Kong International Airport, assert that the RFID
tags have reduced their handling costs per bag from $7 to $4.
Avery also was chosen last year to supply RFID tags to McCarran
International Airport in Las Vegas.
Avery Dennison’s RFID tags have passed the specifications and
system tests and met the performance requirements established by
IATA for the tagging of luggage at airports, giving the company
a head start in the race for future airport contracts. Continual
concerns about terrorism in aviation also will fuel demand for
Avery Dennison’s IATA-approved RFID tags.
The RFID field is fragmented with scores of smaller players.
Some are wholly owned subsidiaries - notably, Savin is now owned
by defense giant Lockheed Martin (NYSE: LMT) - and
consequently they aren’t as pure a play on RFID tags as Avery
Dennison. Another RFID competitor, Alien Technology, is
privately held and does not disclose its financials. More to the
point, Avery Dennison’s state-of-the-art RFID technology
provides the greatest accuracy for increasingly widespread
airport applications.
-- John Persinos
Contributor
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