(09/09/14) Harman: The Connected Car

There has been a lot of talk lately about the connected home—electronic devices like smoke alarms, stereos, and appliances that all talk to one another and can be controlled by a mobile device, notes Tyler Laundon, editor of 100% Letter.

But there is also a large connected opportunity that resides outside of the home. There are over 254 million registered vehicles in the US, versus just 132.5 million housing units. That's a significantly large market.

And the number of new cars sold each year is far above the number of new homes built; 2013 was a record year as 83 million cars were sold worldwide.

The best company to play the connected car is Harman International (HAR). You've likely heard of this company, or at least its well-known brands which include Infinity, JBL, Lexicon, AKG, Harman Kardon, and Mark Levinson.

The company has become the key player to connect new technology developers and auto makers. Its long-term customers include Jeep, Lexus, Chrysler, Toyota, Hyundai, and BMW, among others.

And Ford, Volvo, Ferrari, Maserati, Volkswagen, Audi, Porsche, and Lamborghini are just a few of the company's newly acquired auto customers.

A major switch from a hardware-focused company to a software-focused company is opening up vast opportunities for HAR. It's not just about a car stereo system anymore—it's about back-up cameras, accident prevention, emergency response…even finding a restaurant while on the road.

Thanks to new product introductions in the auto industry, HAR grew revenues in this segment by 24% to $2.84 billion over the last year. Expect more growth here as HAR has recently begun to integrate smart apps, including Google Automotive Link and Apple CarPlay.

Music goes beyond the home and car of course. Harman's "Professional" division includes lighting and sound for major music and sporting events, such as the GRAMMY Awards, Super Bowl Halftime Show, and NBA All-Star Game Concert.

This division is only 16% of sales over the last year. But it also grew fast—by 27% in the last year—to $853 million.

HAR will be doing the audio system install for Disney's theme park in China. It has also just installed upgraded audio systems on the San Francisco Muni Public Transit System, which indicates potential opportunities in transportation infrastructure in the future.

One risk we'll be watching with HAR is the potential for a significant slowdown in auto sales. This would have an impact of course. That said, looking out a few months, auto sales appear to be in good shape. We'll just want to keep an eye on things heading into the end of 2014 and into 2015 too.