Shares of audio systems maker Harman International Industries (HAR: Charts, News) rallied at the end of last week after the company posted strong fourth quarter earnings that topped on both the top and bottom lines. The company, whose brands include JBL and Harman Kardon, posted adjusted earnings of 67 cents per share on revenue of $1.09 billion, which topped analysts’ expectations of 65 cents per share on revenue of $1.08 billion. The company attributed its strong fourth quarter numbers to strong sales in China, boosted by a growing Chinese middle class with increased income.
Looking ahead, however, Harman cut its full year forecast due to a weakening euro. For the full year, Harman revised its earnings per share down from a range between $3.75 and $4.00 per share to a range between $3.67 and $3.92 per share. It also cut its revenue forecast from a range between $4.55 billion and $4.8 billion down to $4.3 billion to $4.6 billion. CEO Dinesh Paliwal commented, “We are feeling cautiously optimistic, but I’d say more towards optimistic because we have secure revenues and we’ve the technology to convert that.”
Although the Eurozone’s troubles are likely to drag on earnings, Harman reported that existing orders were not reduced. Harman generated 43% of its 2011 revenue from Germany, and sales from the rest of Europe accounted for another 20%. The company competes squarely with Bose, Panasonic, Sony (SNE: Charts, News) and Denso.
Harman also provides audio products for higher end automakers such as Audi, Ferrari, BMW and Daimler. The company is preparing to launch a new “infotainment system” which integrates smartphones and tablets into its BMW vehicles, which is also expected to also be available for Daimler early next year. In the luxury vehicle segment, Harman has been fighting off newer rivals Delphi Automotive and Continental. Harman’s products are protected by a strong pipeline of 4,000 patents, which have helped lock out competitors.
Last year, the company diversified into the mid-range car market by providing its audio systems to Toyota (TM: Charts, News). Earlier this year, the company also signed deals with Tata Motors (TTM: Charts, News) in India and Geely and BAIC Motors in China. Two weeks ago, Harman signed a $900 million contract with General Motors (GM: Charts, News). This rapidly growing customer base has analysts excited about the company’s growth prospects, particularly in emerging markets. The company believes that revenue from BRIC nations will grow from its current 12% to over 25% by 2015. As a testament to its growth, the company has $500 million of new orders from China and India.
Harman also recently agreed to acquire India-based Interchain Solution, which produces automotive infotainment products, for an undisclosed amount. Interchain notably produces devices that sync with Android devices. Harman would also inherit a client base including TeleAtlas, MapmyIndia and ALJACS Toyota, as well as several Indian government departments. Acquiring Interchain is forecast to strengthen the company’s Infotainment division, which accounts for 55% of its net revenues. The segment posted 15% year-over-year growth in the fourth quarter.
Shares of Harman are up 51% over the past twelve months, and still trade at a modest 10 times trailing earnings and 11.7 times forward earnings. The stock has a 5-year PEG ratio of 0.47, and pays a quarterly dividend of 8 cents per share – a 0.7% yield at current prices.
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