Harman Receives Additional Contract - Analyst Blog

A developer of audio products and electronic systems, Harman International Industries Inc. (HAR) announced that it has won an additional contract from Volkswagen AG (VLKAY) to provide premium high infotainment solutions for Volkswagen Group brands including Audi, SEAT, Skoda and Volkswagen for Asian markets beginning 2013.

Previously, in the second quarter of 2011 (ended December 31, 2010), Harman received a $1.2 billion contract from Volkswagen Group to provide high infotainment solutions for the Group's vehicles in the U.S and European markets. Including the recent contract, total order value from Volkswagen Group amounts to $1.6 billion.

Harman will deploy its new multimedia-driven system in the above-mentioned vehicles, which offer dynamic navigation, brilliant graphics and internet access. An embedded flash memory will provide dynamic navigation data for current access to routes and road information as required.

The new award reflects Harman's continued dominance in the automobile infotainment market. In the past 12 months, Harman has won a number of contracts from automobile industry bellwethers such as Toyota Motor Corp. (TM), Chrysler Group, Fiat and Daimler AG.

However, the company's automotive revenue declined 1.0% (up 5.0% excluding foreign currency effects) to $664.0 million primarily due to unfavorable foreign currency impact and the divestment of the portable navigation device business (PND). Including PND, revenue would have increased 6.0% in the quarter. We believe the company's strong backlog will drive top-line growth over the long term.

Harman is also introducing new technologies in the automobile infotainment market. In the second quarter, Harman signed a partnership with Sierra Wireless to bring fourth generation (4G)/LTE connectivity to automobiles. This will boost Harman's backlog over the long term.

Harman remains focused on achieving profitable growth, both organic and inorganic. Harman optimism regarding its long-term performance is based on increasing demand for its products, mainly in the emerging markets of Brazil, China, Russia and India. Harman anticipates revenue of around $1.0 billion from China by 2015.

Recommendation

We maintain our Neutral recommendation on a long-term basis (6-12 months). We believe that strong growth from emerging markets, particularly Brazil, India and China will drive top-line growth going forward.

Harman continues to face tough competition from Bose Corp., Boston Acoustics Inc., Pioneer Corp., Yamaha Corp., Rockford Corp. (ROFO), Panasonic Corp. (PC) and Sony Corp. (SNE), which may hurt its profitability going forward.

Currently, Harman has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).