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Pencils Fund Purchase: Navteq (NVT)
Purchase Price: $25.44
Purchase Date: September 8, 2006
Commission: 0
Business
Navteq is the leading provider of digital map information, as they create, update, enhance, license, and distribute the info as a business in the U.S. and Europe. By "digital map information", I mean the maps that you read on Mapquest, Yahoo! Maps, Google Maps, and on the Garmin GPS (Global Positioning System) handheld units. Navteq markets the data to automobile manufacturers as well (this actually makes up the most of the company's revenue), because more and more modern cars have in-dash (built in) GPS systems, and Navteq is providing that data.
Navteq was founded in 1985, but only went public in mid-2004, so they have experience with the business, but is fairly new to the stock market.
I like the experience Navteq brings to this new, up-coming market, and also the businesses they supply to, a nicely diversified product line. But, there is still a large amount of potential out there, which we will explore. Let's take a deeper look into the company.
Financials
Here are some quick financials for Navteq:
Market Cap 2.36B
Enterprise Value 2.15B
Shares Outstanding 93.27M
Employees 1,942
Qtrly Rev Growth (yoy) 10.70%
Revenue (ttm) 527.25M
Gross Margin (ttm) 54.12%
EBITDA (ttm) 156.64M
Oper Margins (ttm) 23.87%
Profit Margin (ttm) 32.00%
Net Income (ttm) 168.22M
EPS (ttm) 1.773
P/E (ttm) 14.30
Return on Assets (ttm) 15.39%
Return on Equity (ttm) 40.36%
Total Cash (mrq) 233.48M
Total Debt (mrq) 0
P/S (ttm) 4.51
These financials show that Navteq knows how to run a profitable business, keep expenses down, and bring in extra cash. The high margins, high ROA and ROE, and large stash of cash (with no debt) show this. The low P/E is an added bonus. But how did the P/E get to such a low (or what I think is low considering the potential the business has) level? Well, given the latest behavior of the market over the past few months, it probably wouldn't be too difficult for you to guess that. Yep, the market was disappointed with earnings (which were released in July), and a barrage of downgrades followed from analysts. This has sent the stock from more than $37.00 to less than $24.00 in a very short time. Simply put, the market isn't in favor of Navteq, and it hasn't been for the whole year really. This has provided us with a great, financially stable business with a lot of potential (which I'll get to soon!), at quite a cheap price.
The reason I see potential here is quite simple: Navteq is the leader in providing map data, and the largest percentage of their revenue is from providing to automobile manufacturers. This is still a relatively small market (not a whole lot of modern cars have in-dash GPS systems... yet), and over time I am highly confident that it will grow. This is because it is natural for humans to want all the high-tech gadgets with a vehicle, and GPS systems in vehicles are starting to rise. In short, the GPS market, both in cars and with handheld systems, is evolving. GPS systems feature turn-by-turn route guidance, and Navteq is researching and innovating this technology data.
The 2Q release, which caused the large sell-off, wasn't the best, and I'll admit that. There was a slow-down in Net Income, but I still believe that the business is intact and it was a temporary slow-down. I think that for the long-term, Navteq will be fine, and the short-term movements and volatility will continue, maybe even providing a better opportunity than this one. Frankly, I wish I knew. But, this is why I've given up trying to predict short-term movements and get the perfect price. I think the potential and opportunity over the next 10+ years is great, and I believe Navteq is in the financial position to really take advantage of this opportunity and be highly profitable from it. The high amount of cash Navteq carries now will likely be invested into these opportunities.
Management
Let's take a quick glance at management.
Judson Green acts as President and CEO, and he has been with Navteq since 2000 (which is longer than the average in today's corporate world, might I add. This is always a good sign). His previous positions include CFO of Walt Disney in the late '80's and early '90's. I like his experience with Navteq, and I think his overall experience will make him a good man to make the decisions.
Information on other executives and directors can be found here.
Competition
Navteq's competition is minimal. Tele-Atlas is probably the main competitor, and Yahoo! lists other competitors as Intergraph Corp. and Mapinfo Corp. There is very little information available on these companies on Yahoo! Finance, so it is difficult to assess whether they pose a large threat to Navteq or not. Navteq is the largest, both in terms of size and net income, so I think they will be fine in the future. I'll keep an eye on the competition, but right now it isn't anything, in my opinion, to be worrying about a great deal. Let's just say there are probably larger threats to Navteq.
What to Look For
-- Expansion; I actually think the international markets can wait with Navteq, because the U.S. still has a huge amount of potential, so I think Navteq's time would best be spent here. I'm not expecting anything quick to happen with Navteq, I think a 10 year timeframe will be needed, with extra patience. But, expansion, both domestically and internationally, will be something to watch.
-- Profits; I want to see Navteq keeping its financial stability and margins strong, which becomes more difficult (or probably will) as the company expands and starts increasing revenue (and hopefully income!). They will need to keep costs down to make the most of this long-term opportunity, and I'm confident that they will be able to. But, anything can happen, so this will be something I keep a close watch on.
Valuation
Analysts expect 25% annual growth for the next five years. Personally, I think 20% is more reasonable, because as I said before, the expansion process will take time, but I'll use both rates. I'm going to use a P/E of 20 for five years out, which is low, but I think it is good to be cautious with this calculation. First, let's use the growth analysts expect. Current EPS is 1.773.
1.772 * (1.25^5) * 20 = 108.15
With my expectations:
1.772 * (1.2^5) * 20 = 88.19
And for "not at all expected scenario" let's expect a P/E of 14.3 (which is the same as today's P/E) and a growth rate of 15%.
1.772 * (1.15^5) * 14.3 = 50.97
So, with a pretty low growth rate and a P/E the same as today's, we'd have a double. That's how much the market has beaten up this stock, even though the potential is the same, the financials are still very good, and the company is a world leader in a growing sector.
Conclusion
After researching Navteq, I believe more strongly than ever that they have been hurt tremendously by the stock market, and a simple short-term overreaction on one quarter of earnings is what's done it. The strong financial position and low P/E for a company with so much opportunity in front of it makes me believe even stronger that today's prices will be very cheap in 10 years and beyond, and I hope to stay an owner of Navteq for many more years to come.
Tags:
business, investing, navteq, pencils fund, stocks, valuation
Posted at: 05:54 PM | Add Comment
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