Article on RFIDNEW YORK (MarketWatch) -- Investors can be forgiven for buying into the hype of radio frequency identification, or RFID, the tracking technology supposed to replace bar codes and make retail distribution vastly more efficient.
Industry insiders boast that RFID is being used to keep tabs on everything from the freshness of grocery-store lettuce to the location of aerospace devices in the Pentagon's $30 billion supply chain.
But this handful of applications will not spur widespread adoption of the technology anytime soon, some argue. Despite signs that RFID is improving warehouse and shipping processes, Wall Street analysts estimate that RFID hardware, software and consulting services contribute less than 5% to the revenues and earnings of most RFID players. Sales are expected to grow by about 3% in 2006. Tech market analysts at Gartner expect demand for RFID sales to fall well below $1 billion in 2006, versus roughly $5 billion for bar codes.
"I don't expect RFID sales to reach an inflection point until 2007, at the earliest," said Reik Read, an analyst with RW Baird who authors a monthly RFID newsletter.
Analysts say that leading RFID companies like Manhattan Associates (MANH : manhattan assocs inc com
News , chart, profile, more
Last: 21.35-0.27-1.25%
3:59pm 02/10/2006
Add to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
21.35, -0.27, -1.2%) , Symbol Technologies (SBL : Symbol Technologies, Inc.
News , chart, profile, more
Last: 13.27+0.19+1.45%
4:01pm 02/10/2006
Add to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
13.27, +0.19, +1.5%) and Intermec (IN : intermec inc com
News , chart, profile, more
Last: 32.85+0.34+1.05%
4:02pm 02/10/2006
Add to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
32.85, +0.34, +1.0%) , have seen their stocks rally from sales of non-RFID products and services.
The stock of Atlanta-based Manhattan Associates -- which is helping more than 60 companies participate in RFID projects with Wal-Mart, Target, Best Buy and pharmaceutical companies -- is priced near the top of its 52-week trading band at over $21 a share.
Third-quarter earnings that doubled analysts expectations propelled the stock of Symbol Technologies of Holtsville, N.Y., from $8 to about $12.50. That price is 24 times Symbol's expected earnings per share for 2006, compared with the average of 20 for the information-technology stocks in the Standard and Poor's 1500 Index.
Intermec Technologies of Everett, Wash., is trading around $35, a fraction below its 52-week high, and about 39 times estimated 2006 earnings.
"Right now, [price-to-earnings] multiples are a bit stretched," said Read. "Investors would be wise to be cautious in the near term and avoid the excitement factor around RFID."
RFID uses radio waves to transmit data stored in electronic sensors placed on products. The data indicates the retail ID number, type and origin of the goods. But at 15 to 25 cents per sensor -- compared with less than a penny for bar codes -- RFID is too expensive for individual products, and used almost exclusively by large manufactures and retailers for tracking bulk shipments.
A radio antenna mounted on a forklift, for example, will detect RFID sensors on bundles unloaded at a warehouse dock. The sensor automatically transmits the product data into the warehouse accounting and tracking systems. This replaces the workers that scan bar codes by hand.
Paul Fox, a spokesperson for Gillette (PG : The Procter & Gamble Company
News , chart, profile, more
Last: 59.70+0.08+0.13%
4:00pm 02/10/2006
Add to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
59.70, +0.08, +0.1%) , said that in pilot projects RFID technology has yielded a 400% reduction in common shipping errors like forklifts picking up the wrong items and warehouse personnel double counting goods. Wal-Mart (WMT : Wal-Mart Stores, Inc.
News , chart, profile, more
Last: 45.75+0.05+0.11%
4:00pm 02/10/2006
Add to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
45.75, +0.05, +0.1%) reported a 63% improvement in replenishing out of stock items in stores using RFID for inventory.
For smaller retailers and manufacturers, however, getting shippers to use RFID and agree on what product data to encode in the sensors has proven difficult. "Most shipping companies see RFID as a tax," said Robert Schwartz, analyst with Jefferies and Co. Many have balked at having to buy the necessary hardware and software.
Another problem is that only the latest RFID devices are compatible with each other, creating problems between shippers and manufacturers using different RFID equipment.
Still, RFID sales may soon turn a corner. Fifty-three percent of executives surveyed recently by the Aberdeen Group said they plan to start using RFID in the next 12 months to 24 months to streamline operations and logistics.
What's more, RFID is showing promise when applied to specialized supply chain applications. Gillette is using RFID sensors to make sure retailers use promotional displays for items like Crest White Strips and new Fusion razors. And Pfizer is experimenting with RFID labels to keep counterfeit Viagra off the market.
"No other technology can collect and relay such sophisticated data to people making decisions in the supply chain," said John Fontanella, who conducted the Aberdeen study.
Analysts and insiders expect companies to move from experimenting with RFID to widespread use in the next few years. That's when those RFID valuations might get justified