TomTom and Oshkosh

People in the future will be safer by not having Tom Cruise driving cars around the city. That is for sure.

During the past few years we have all heard about the determination companies are having to develop self-driving technology, but why?  The self-driving technology will change hundreds of years of the way we drive, because it is more efficient and convenient for us.

Just imagine how much easier it would be to have just one car to drive everyone in your family. Or not having to worry about parking, because the car will drive itself back to your house.

Yes, the self-driving cars will be taking over the streets pretty soon. It is estimated that more than 10 million self-driving cars will be on the streets by 2020, and 92% of all cars sold will have driver-assisting technology. We will be reaching the number of 120 million cars by 2030, and half of the new cars will have the potential to self-drive.

Four states in the US already passed laws permitting the use of the self-driving technology: Nevada, Michigan, California, and even Florida.  Well, self-driving cars are having much more media impact than the trucks, and we can blame companies like Google and Tesla for that, but all you hear about them are bad news, car crashes and people dying.  That is because they are still testing their prototypes.

Unlike cars, self-driving trucks have been a reality for years in services that require little human judgement.  Agricultural services, and the Army are already using driverless machines on their operations. Commercial trucks, and even transportation services like cabs and Uber will all eventually adopt the technology.

Trucking Companies are expected to add the self-driving technology to their fleets because of the cost savings that can be delivered. Estimates are that the trucking industry could save as much as $168 billion every year just by acquiring the autonomous technology. Fuel efficiency, increase in productivity, accidents reduction, and mostly labor savings. Today there are 3.5 million truck drivers just in the United States. $70 billion dollars of savings could come just from labor cuts.

Ride-sharing businesses, such as Uber and Lyft, estimate that 81% of their total cost is driver’s, so just like truck companies, they could significantly bring down their costs by acquiring the self-driving technology as well.

Two stocks in the segment should drive themselves already.

TomTom is the company that produces those GPS devices that were actually a thing before the invention of cellphones.  TomTom has four main sources of revenue: Consumer, licensing, telematics, and automotive products. They are now focusing on developing highly accurate maps for autonomous driving.

Why is that important?

While the inaccuracy in GPS systems can be managed by human judgement, you will not turn your car into the ocean, even when the GPS tells you to.

But the self-driving car will drive you off a cliff, if it follows a faulty mapping system.

That is why TomTom and other big names are investing in this segment. The self-driving car will only drive if accurate maps are available. The whole industry is dependent on the success of the mapping technology.

Their closest competitor, Garmin, is not developing any similar self-driving technology. TomTom also offers fleet management services, for companies of any size or kind.  Their WEBFLEET software is the largest platform in the industry, with 650,000 subscriptions world-wide.

That is where there will be the largest room for growth when the self-driving technology becomes available. Imagine how many cars or trucks the companies will have to track, 24 hours per day, when their fleet becomes self-driving.

This software represented only 3.5% of their total revenue in 2010, and now represents 13.4%.  Their large increase on their revenue will come from their telematics department, led by their WEBFLEET software.

Big portion of the testing and development of self-driving technology are happening in Europe in North America. Demand for self-driving cars will first increase in developed countries, where TomTom has most of their revenue coming from. Europe represents 77% of TomTom’s total revenue, while North America represents 19%.  My Pro Forma estimates are that TomTom will grow 35% in 2017 compared to 2016, achieving $1.5 billion in sales. Earnings per share will be more than double than the 2016, from $0.28 to $0.68.

I used the Franchise Value Model and the Residual Income Model to come up with a fair value for TomTom’s stock of $11 a share, an undervaluation of 18% from today’s price.

The second company is Oshkosh Corporation.

They are specialized in building military and emergency trucks, being the first to manufacture the self-driving technology for ground operations.  In 2013 their defense department released a self-driving technology for their own military trucks. This tech allows them to operate their truck in full autonomous mode, under any weather situation. Also, this technology provides more security to soldiers that are on the field.

The defense department represented 73% of the company’s total revenue back in 2010, but today it only represents 15%, even though the total revenue of the company remained pretty much stable over the years. That means that any minor growth in the defense department could represent a huge increase in total revenue.

Oshkosh’s revenue is correlated with U.S. defense spending. U.S. will be replacing 140,000 combat vehicles, and Oshkosh is already one step ahead from his competitors, by winning all the contracts so far.   Defense will lead Oshkosh to a growth of 30% in 2017, achieving close to $8 billion in sales. The defense department will represent 28.5% of the revenue of the company. Earnings per share with achieve a growth of 110% in 2017.

I used the same models to valuate Oshkosh. I came up with a fair price for the stock of around $70, an undervaluation of 33%.

Because it is an inevitable future.

Because it is a deliverable reality.

Because TomTom and Oshkosh rhythm with my name Tom Kaufmann, I recommend TomTom and Oshkosh for your portfolio.

 

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