This Company is Ahead of the (Tag) Game

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.