Buy into the wireless machine revolution

When a CategoryThree hurricane is heading for your home, you could be forgiven for panicking. But as towns along the Gulf of Mexico were evacuated last month ahead of Hurricane Gustav, some cars and jeeps simply peeled calmly out of their drives, then fanned out in every direction as if guided out of town by some invisible hand. In fact they were. As they cruised out of their neighbourhoods, owners of General Motors-manufactured vehicles switched on new computers they'd had installed and were immediately hooked up to a local command centre. There, advisers waited with computerised maps and advice for the best back-road route out of town. By the time drivers had made it out of New Orleans and Louisiana, the computer had told them where to get the best gas prices, where to stay in the next State and even what progress their loved ones had made out of town.

This technology is called 'telematics', or machine-to-machine (M2M) technology. It's a €700bn industry, which is growing at 14% a year. Telematics is about sending and receiving information to cars or machines over mobile networks. The GM cars allowed drivers to call the command centre for directions. But if they'd crashed, the computer would also have notified the emergency services feeding ambulances information en route about the scale of the impact and any important medical details they'd need to know about the passengers. And if the car had been hijacked, the culprits wouldn't have got far, as the police would be tracking them.

These devices have proved so impressive in improving car safety that governments are trying to bring them into legislation, says Paul Hill in his Precision Guided Investments newsletter. The EU is pushing for all new cars to be fitted as standard with a 'black box' hub by 2010, to assist the emergency services. With 15 million cars sold annually in the EU, that's a huge opportunity, and 16 countries have already signed up. In the US, 50 million vehicles will incorporate the technology, reckons Phil Magney of the Telematics Research Group.

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But telematics isn't just about cars. By attaching such devices to electricity and gas meters, energy groups can take readings without visiting our homes, saving on manpower. Telematics also has a range of security features new alarm systems can photograph burglars and relay the pictures to the police station within minutes. And delivery groups are making great strides managing their fleets as they track their trucks' driving times. According to research group Berg Insight, the number of mobile network connections used for M2M will jump from 37.5 million in 2007 to 186 million in 2012.

The biggest difficulty has been the cost. Telematics was left in the dust after the dotcom bust. Projections for industry growth had gone haywire, ignoring the high cost of mobile phone calls at the time. But the cost of wireless calls has dived in recent years and much of the costs that come with telematics devices in cars will be taken up by advertisers anyway, Microsoft Automotive's Velle Kolde told Wired: "McDonald's wants to capture people when they're driving around hungry." That kind of support should be enough to take this technology mass market. Below, we look at one telematic group already thriving.

The best stock in the sector

One company right at the heart of the wireless machine revolution, with a 25-30% share of the market, is Paris-listed Wavecom (Paris:AVM). This is Paul Hill's top pick in this space because it has a "rock-solid balance sheet, a leading position in the market and a very capable management team".

Wavecom's devices are sold in the most promising areas in the M2M market making vehicles safer, making energy consumption efficient and safeguarding homes. Barriers to entry are also high. Wavecom has over 100 patents protecting its intellectual property, which protects it against new rivals entering the market. And, reassuring in a climate of tight credit markets, the company possesses a very strong balance sheet with net cash of €50.3m.

Recently though, Wavecom's share price has been suffering it is sitting at three-year lows after investors got too excited about the stock's potential and drove it up to €27 a share. However, with the industry thriving global shipments of M2M devices are expected to grow by 32% a year until 2012, according to research group Berg Insight Wavecom will soon be back on track, with sales growing over 14% this year and next. In fact, Hill sees a 115% upside for the stock between now and December 2010. He values the shares on a forward p/e of 5.5, which looks extremely good value.