11 Mar Avery Dennison (AVY)

A Tiny Way to Big Profits

Imagine this. You go to your local supermarket, put anything you want in your shopping trolley and then just wheel it out of the door straight to your car. No scanning things one at a time and packing and repacking at a cash register. Just waltz on out.

Before long you won’t need to imagine it. It will become a reality, thanks to tiny radio emitting devices called RFID chips.

And this imaginary future will be with you sooner than you think for Amazon (AMZN) is opening the first store using this no-check-out feature in Seattle. The store will be called Go Grocery.

Instead of the items in the store having a bar-code they will use a tiny chip, a Radio Frequency Identification Device. These tiny little squares emit a radio signal that identifies the item and the cost. As you push your shopping trolley through the door, a scanner reads all the items in the cart in one go and then charges your Amazon account accordingly.

This technology will reduce expenses for grocery stores and time for consumers. It is likely to go to all retail items. Just imagine if shopping meant never going to the check-out. Just pick the item you want and walk out the door.

The number of RFID chips required for this is mind-boggling. How would you feel if you owned the company that makes these chips? Do you think your company could be making very large profits in the future?

Well, you can, and we have picked out two for you.

In the past, the go-to RFID company was Impinj (PI). For 20 years this Seattle company has been doing most of the heavy lifting to get RFID to the mainstream. Inpinj makes digital tags, readers, gateways and enterprise management software to help retailers track items in real-time throughout their supply chain and retail outlets.

However, we feel a better RFID play is Avery Dennison (AVY). The company is best known for making the stick-on labels used by all kinds of industries. It was established in 1935 and reported sales in 2019 were over US7billion.

Recently the company has aggressively moved into RFID. Last November it acquired Smartrac, the world’s largest maker of RFID inlays used in ePassports. A month later they opened a new manufacturing plant in Brazil.

Avery Denison now controls more than 1,000 RFID patents and is well-positioned to leverage its relationships with leading consumer brands. The company began a pilot program with Ralph Lauren in November 2019. Printed tags attached to the label inside shirts, pants and other garments contain a digital tag, according to a story published in Women’s Wear Daily. The tags give the clothing a purely digital identity that makes inventory tracking and offering better post-sale customer experiences a snap.

The strengths of RFID also make it a natural fit for grocery. Items can be tagged and batch-read. This means the retailers know exactly how many items are on the store shelf at all times with only one scan. This reduces waste and the labor costs associated with inventory and retagging.

Amazon.com is winning online retail by making shopping frictionless. Avery Denison is making digital products to make this a reality in the physical world.

Shares trade at 16x forward earnings and 1.4x sales. It looks like a buy on this pullback for patient value investors.

The author does not hold an investment in the company mentioned and has not been renumerated for this report