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INVESTOR’S REPORTDRIVINGFOR DOLLARSFive Ways To ReapMassive Profits fromAutonomous CarsFile NumberFile Type8 3 9 8 2 0 1 0 3 2ConfidentialOpen Access
Investor’s ReportFrom: William Patalon III,Executive Editor, Money MorningDriving For Dollars:Five Ways To Reap Massive Profitsfrom Autonomous CarsTucked in among my collection of old pilot logbooks; journals thatchronicle trips by ship, car and airplane; and pictures of historic eventsis a photo of four “antique” cars that appear to be lined up for the startof a race.The story behind that picture – which I’m sharing with you here – isactually much more interesting.You see, the black-and-white image depicts the birth of thetranscontinental highway system.In the spring of 1915 – over 100 years ago – a man named Henry C.Osterman and a special film crew set out on a trip to document the LincolnHighway, the first highway for automobiles to traverse the continent.A 1912 brainchild of Indiana entrepreneur Carl G. Fisher (creatorof the first auto dealership in the United States as well as theIndianapolis Motor Speedway), the Lincoln Highway was dedicated onOct. 31, 1913. The new freeway started in New York’s Times Square,ran 3,389 miles through 13 states and terminated in San Francisco’sLincoln Park.Osterman was the vice president and field secretary of the LincolnHighway Association, the group whose mandate was to promote thenew thoroughfare – and auto travel in general. One way to achieve boththese goals was to film a documentary that could be shown in theatersacross America.The film crew took four whole months to make the cross-country runand arrived at the Panama-Pacific International Exposition (PPIE) in
PRIVATE BRIEFINGInvestor’s ReportSan Francisco – to cheering crowds and a special “Lincoln HighwayDay” celebration.The picture displayed here is a snapshot of that sojourn, takensomewhere along the way. (In fact, if you look carefully, you’ll seean “L” identifier logo on the sides of each of the four cars.)A special film crew of the Lincoln Highway Association during its 1915 trip across thecountry to document the Lincoln Highway, the first transcontinental highway in America.I’m telling you this century-old story for two reasons.There’s a modern parallel tale: and we’re going to use that story tomake you all some money.So let’s get started Two-Lane BlacktopIn March 2015, a Delphi Automotive PLC (NYSE: DLPH) AudiSQ5 SUV left San Francisco to begin a 3,500-mile trip to New York City.The Delphi Audi is special in a lot of ways.First and foremost, it’s packed with technology – including an arrayof cameras, laser measuring devices and 22 sensors.The SUV is special in another way, too.There’s no driver.2
PRIVATE BRIEFINGInvestor’s ReportThat makes this trip thelongest automated drive everattempted in North America –and the first “driverless” autocrossing of the United States.The Audi’s technologypackage provides the vehiclewith 360-degree, 3D vision ofthe road around it. The SUV is expected to maneuver around bicyclistsand pedestrians, navigate four-way intersections and merge withhighway traffic.The only human presence is an engineer who’s aboard to monitor thetechnology and make observations (and, in an emergency, to take control).Delphi Chief Technology Officer Jeff Owens said the car has beensuccessfully tested on streets in California and Las Vegas, but the crosscountry trip will be the car’s “ultimate test.”“The vehicle will be challenged under a variety of driving conditionsfrom changing weather and terrain to potential road hazards – things thatcould never truly be tested in a lab,” Owens said.The cross-country jaunt by the Delphi’s SUV is an “ignition point”for both the driverless and connected-car markets.When you really look at this, the trip landed a little media play buthasn’t really grabbed the major headlines you’d expect with a story ofthis magnitude.But it’s actually a major proofpoint of the technology. This tripillustrates that driverless features areready now. And I think there’s nogoing back. The driverless market– vehicles with driverless features –will become a meaningful part of theauto-sector economy by 2018.3
PRIVATE BRIEFINGInvestor’s ReportFolks think of the driverless car market as an “all-or-nothing” gambit.But even if we don’t go “all driverless,” there will be big markets forsuch “autonomous” technologies as lane following, collision avoidance,parking assistance and anti-drowsiness driving.If you look at the potential from that perspective, there’s no puttingthe genie back in the bottle – or the driver back in the car.And look at some of the predictions, including: By early 2017, the U.S. Department of Transportation hopesto enact rules – and a deadline – mandating vehicle-to-vehicle(V2V) communications. By 2020, ABI Research forecasts that truly self-driving cars willbecome a reality – launching a trend that has 10 million of thesevehicles every year by 2032. By 2035, Navigant Research forecasts that sales of autonomousvehicles will reach 95.4 million annually, representing 75% of alllight-duty vehicle sales. And by 2040, the Institute of Electrical and ElectronicsEngineers (IEEE) estimates that as much as 75% of all vehicleswill be autonomous.And driverless cars – also known as “autonomous vehicles” – willignite a massive growth cycle.One “piece” of the autonomous vehicle market – the socalled connected car sector (and even some interesting offshoots)offers tremendous incremental growth. According to a PwC report, themarket for “connected” hardware and software will reach 152 billionin 2020.And it will grow fast – at a 29% compound annual pace from this year.Fortunately, you don’t have to wait until 2018, 2020, 2035 or 2040 tograb a piece of the action.4
PRIVATE BRIEFINGInvestor’s ReportDriving for DollarsHere are five ways to get in on the action now.Driverless Vehicle Play No. 1:Ford Motor Co. (NYSE: F)More than any other company,Ford shaped the U.S. automobileindustry.Founded in Detroit by HenryFord in 1903 with 28,000 of capital, Ford Motor Co. was nearly brokeby the time it sold its first Model A. But within six weeks, the youngcompany had turned a 37,000 profit.In 1908, Ford introduced the Model T, a car designed to be easy tomaintain and affordable for most Americans. By the time the Model Twas discontinued in 1927, 15 million had been sold.The need to build cars more quickly to meet rapidly rising demandled Ford to innovate several breakthroughs.The tradition of innovation continued in the 21st century with theEcoBoost engine (2009), and, in recent years, a focus on incorporatingthe latest tech trends into its business including the Ford SmartMobility startup.By creating the Smart Mobility startup – and hiring former SteelcaseCEO Jim Hackett to run it – the “Blue Oval” has created a venture tofocus on ridesharing, driverless cars and the “connected” vehicle. Andit put an ace exec at the wheel. In just 15 months as the interim athleticdirector for the University of Michigan, Hackett fixed a once-greatfootball program that had become laughable and scored a big coupby landing former San Francisco 49ers Head Coach Jim Harbaugh as thecollege coach. Hackett will help Ford get traction in this realm.An added bonus with this stock is Ford’s impressive 4.8% dividendyield. So Ford stock delivers both growth and income. It doesn’t getmuch better than that.5
PRIVATE BRIEFINGInvestor’s ReportDriverless Vehicle Play No. 2:NXP Semiconductors NV (Nasdaq: NXPI)NXP Semiconductors NV,an Eindhoven, Netherlands-based isa leader in the area of known as “nearfield communication” technology andis poised to benefit from two big-timecatalysts: mobile payments and the emergence of “wireless charging.”Thanks to its recent 12 billion merger with Freescale Semiconductor,NXP is already a leading supplier to the automotive market.In 2015, NXP made a name for itself as a global leader in secureconnected car technologies after it released its patented 77GHz radartransceiver. The NXP chip enables a new generation of radar sensorassemblies, roughly the size of a postage stamp, that can be integrated“invisibly” practically anywhere in the car – a great advantage forvehicle designers as the number of sensors steadily increases on theroad towards automated driving. Its power consumption is 40 percentlower than conventional radar ICs. Key safety applications includeemergency braking, adaptive cruise control, blind-spot monitoring,cross-traffic alert and automated-parking.“Building the world’s smallest, fully integrated 77GHz chipwill pave the way for self-driving cars and drive increased ADASadoption in the volume market,” said Torsten Lehmann, senior vicepresident infotainment and driver assistance at NXP. “In self-drivingcars, a ‘cocoon’ of radar sensors is required to provide a robust highresolution, 360 degree view of the environment. This is a real challengeusing traditional, bulky radar hardware. Manufacturers are also eagerto replace existing ultra-sonic based park distance control systems with“invisible” radar sensors and avoid unattractive holes in the bumperwhile improving performance and features.”With Freescale on board, NXP’s auto-related sales will doubleto 40% of total revenue. It also makes NXP the No.1 supplier of6
PRIVATE BRIEFINGInvestor’s Reportautomotive-related chips in the world, vaulting it ahead of Tokyo-basedRenesas Electronics Corp. (OTC: RNECY).IHS Research estimates radar-based ADAS will increase 23% yearon-year to reach 50 million radar sensors by 2021.NXP’s strategy is to target the entire market: self-driving cars andthe higher-volume advanced driver assistance systems category.NXP currently trades around 96 and is currently up nearly 64%over the past year.Driverless Vehicle Play No. 3:Delphi Automotive PLC (NYSE: DLPH)The once-struggling firm isuniquely poised to benefit fromthe marriage of new vehiclesand high-tech systems.Strictly speaking, Delphiisn’t simply focused on theconnected car, per se. Instead, it takes a much more wide-rangingapproach to supplying the auto industry with must-have technology.Based in the Detroit suburb of Troy, Mich., Delphi offers a widerange of products used throughout the industry. For instance, it makesbody control panels that feature remote keyless entry and alarms. Italso makes digital displays designed to improve driver awareness.And these days, it’s getting a lot of media attention for itssophisticated safety devices. These include adaptive cruise control, lanedeparture warnings systems, and front and rear cameras integrated withcollision avoidance radar.Company officials say active safety is a major growth area forDelphi, adding that they already have a 1 billion backlog of orders inthis segment.7
PRIVATE BRIEFINGInvestor’s ReportIts focus on tech and new cash flow both represent a majorturnaround for a company that filed for bankruptcy protection in 2005.That was a year after it suffered a stunning 4.75 billion loss as acompany that made sparkplugs, steering wheels, and ball bearings.Reorganized as a tech-focused auto supplier, Delphi went public in2011 at 22 a share and was recently trading at around 70, for a postIPO gain of 218%.But the stock still has plenty of upside because of the huge role itplays in the global auto industry.It sells to more than a dozen major brand names and boasts some 2million parts numbers – Delphi ships more than 60 million parts aroundthe world every day.No wonder Delphi earns a stunning 39.9% return on stockholdersequity, twice the industry average. It also has an operating margin and areturn on assets of 11.2%Over the past three years, Delphi has grown earnings per share by35%, meaning they could double in less than three years.Delphi is much more than just a company reborn. It’s a key catalystfor one of the greatest auto-tech booms ever. And it’s racking up plenty ofprofits for its shareholders along the way.Driverless Vehicle Play No. 4:Neonode Inc. (Nasdaq: NEON)An ultra-high-risk play, the Stockholm, Sweden-based firm isdeveloping a new “human machine interface sensing product for steeringwheel applications.”It specializes in touchtechnologies, especiallythose that help drivers“interact” with a car’s infotainment system with “eyes on the road andhands on the wheel” – a capability that will benefit from surging demandas cars become more and more connected.8
PRIVATE BRIEFINGInvestor’s ReportLast year, Neonode announced an important new alliance with amajor Swedish automotive safety supplier, Autoliv Development AB.Under the agreement, Neonode and Autoliv will develop anew Human Machine Interface (“HMI”) sensing product for vehiclesteering wheels.Neonode will license its zForce DRIVE technology to Autoliv inexchange for 3 million in fees, with 1.5 million in upfront paymentsand the remainder to come roughly a year later.The deal could have a dramatic impact on sales. Last year, theycame in at 4.7 million, up 27% from the year before.Neonode’s zForce Drive Steering Wheel enhances the driver’sability to keep both hands on the steering wheel and eyes on the road.The system is based on the use of optical infrared light and isdesigned to interact with a heads up display inside the dash and in frontof the driver.For instance, instead of having audio and cruise control functionson the steering post, those are moved to the wheel itself. To answera Bluetooth mobile phone, you simply swipe the appropriate light onthe wheel to perform that function.The sensors allow the car to know exactly where on the wheel thedriver has his hands at any given moment. If they driver’s hands arenot in the right location for a particular task a red light illuminates as awarning.And it’s designed with autonomous driving in mind. In self-drivingmode, a green light at the top of the wheel turns on. If the driver wantsto go back to manual, the system’s light sensors guide the driver to theappropriate hand positions.Founded in 2001, the fast mover counts some of the world’sleading consumer firms as clients. These include Alpine GroupInc. (OTC: APNI), Amazon.com Inc. (Nasdaq: AMZN), SonyCorp. (NYSE ADR: SNE) and Volvo AB (OTC: VOLVY).9
PRIVATE BRIEFINGInvestor’s ReportWith a market cap of 84 million, the stock trades at just under 2with an analyst target of 4 , roughly a 131.2% climb from where itcurrently trades.Yes, the young firm is still losing money as it gears up for increasedadoption of its technology, particularly in the burgeoning automotivesensor market.But at this price, I believe the potential upside is well worth the riskinherent in trading in a microcap tech firm.Driverless Vehicle Play No. 5:Mobileye NV (NYSE: MBLY)One of 2014’s top IPOs is also one of themost promising driverless car stocks.This Jerusalem-based companydesigns and develops software and relatedtechnologies for camera-based ADAS.Mobileye’s software algorithms and EyeQ system-on-a-chip (SOC)offerings can deliver “lane keeping” – automated steering that keeps a carin the center of its lane and allows for short periods of hands-free driving. Italso has lane-departure modules that warn drivers of encroaching vehicles.The firm’s Automatic Emergency Braking System detectsimminent collisions. It can warn the driver or, as a last resort, trigger selfbraking to prevent collisions.And whether or not regulators will allow it, Mobileye claims itstechnology will allow hands-free highway driving by next year.No wonder so many major carmakers are anxious to do businesswith the firm. It’s working with at least 15 global leaders, including AudiAG, Ford, General Motors, Tesla and Volvo AB.Founded 17 years ago, Mobileye went public in July 2014. Its initialpublic offering (IPO) was highly successful, jumping some 48% on a daywhen the markets were slumping.10
PRIVATE BRIEFINGInvestor’s ReportMobileye currently trades around 43.90 a share, Mobileye has a 9.62 billion market cap – and it’s a growth machine. Over the past threeyears, sales have increased an average 107% annually, meaning they’redoubling every eight months.Driverless Vehicle Play No. 6:Harman Intl. Industries Inc. (NYSE: HAR)There’s no question that drivers wantaccess to the Internet for everything fromnavigation to entertainment. By 2022, 94%of all new cars will be connected to thecloud, up from 34% last year, predicts IHSAutomotive. But how will they connect?The “built-in vs. brought-in” debate has huge implications forcompanies like Harman International Industries, the leader in embeddedtechnology. It sold 3.1 billion worth of infotainment systems tocarmakers in the fiscal year ended June 30, 2015, accounting for half ofits 6.2 billion in total revenue.“In today’s digital world, consumers increasingly consider theirvehicles as hubs to enable their connected lifestyles,” said JohnFitzgerald, senior vice president and general manager, Car Audio forHarman. “With improved connectivity and in-car audio innovation,Harman continues to push boundaries and develop new, unprecedentedexperiences for connected consumers in all vehicle segments and markets.”On Jan. 28 Chief Executive Dinesh Paliwal said Harman was ontrack to meet its 2016 financial targets as planned. But investors werespooked by the fact that revenue growth from the company’s connectedcar division slowed to 9% from the prior quarter’s torrid 19%, sendingthe stock down 13%.It was nothing new for Harman, which despite 11 straight quartersof steady earnings growth has been riding a roller coaster on Wall Street.Shares soared from about 40 in early 2013 to nearly 150 last year11
PRIVATE BRIEFINGInvestor’s Reportbefore coming back down to earth and settling around 80. “It’s a bigdebate stock–second only to Tesla,” said JPMorgan’s Ryan Brinkman.Howeverm, Paliwal, the 58-year-old CEO, is so confident that builtin systems will prevail that he has wagered more than 1 billion in thelast year to give Harman an advantage. Since January 2015 the companyhas made three strategic moves to acquire critical technology for the eraof connected cars. It paid 780 million to buy California software makerSymphony Teleca for its cloud computing and analytics capability. Itspent 170 million to buy Israeli tech firm Red Bend, whose softwareenables over-the-air vehicle updates. And two months ago it added Israelicybersecurity firm TowerSec for its anti-hacking software.Harman was one of the early recommendations we followed in theautonomous car space.And it’s easy to see why.Better yet, we weren’t the only ones who recognized the potentialwithin this ()-based firm.In 2016, Samsung Electronics Co. (KRX: 005930) agreed to purchaseHarman in an 8 million deal – the biggest deal in Samsung’s history.Acquisitions like this is just another avenue for investors to makemoney on the autonomous car trend.Watch the Early AdoptersI’ve spent some time as an ink-stained journalist – and won a fewawards while doing so – and so I’m quite familiar with the saying “never letthe facts get in the way of a good story.” And, apparently, so is that YahooFinance writer.The author of the story, Rick Newman, calls self-driving technology“the next big plaything for the rich” – and then adds that “an automotiverevolution may be at hand, but a people’s revolution it is not.”From where I stand, Newman is dead wrong about the likelihood ofautonomous vehicles eventually reaching everyday consumers. However,12
PRIVATE BRIEFINGInvestor’s Reporthe is right about self-driving technology being mostly for the well-offright now.And that’s a good thing.In my world, the world of Silicon Valley, we need early adopters. Theyare willing to pay top dollar to get the latest tech advances before they gomainstream.These early adopters pave the way for mass markets by establishing theeconomies of scale needed to drive down prices so average consumers canafford to buy.Just look in your living room. In August 1998, The New YorkTimes decried what it called “sticker shock” for high-definition televisions,noting the “least expensive ones will cost 8,000.”Today, thanks to early adopters, you can find HDTVs that are 50%larger, twice as sharp, use one-quarter the electricity, are 70% thinner andcost up to 90% less.Similar stories can be told about home computers, cell phones, digitalcameras – even the car itself.The same thing is happening in the self-driving technology today.13
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In March 2015, a Delphi Automotive PLC (NYSE: DLPH) Audi SQ5 SUV left San Francisco to begin a 3,500-mile trip to New York City . The Delphi Audi is special in a lot of ways.
