NCR stock has been hammered recently along with anything else financial-related. While the CDO, CLO and WFO abbreviations are not lurking in the company's balance sheet, the revenue for the company is expected to hurt in 2008 as its main customers, banks, cut on their capex in an attempt to hoard some cash. This fear has driven a stock down to $24 a share from $50 high, which presents a good buying opportunity, although it might be some time before it bounces back to $50: having not reacted to the news of UTX bid for Diebold, there are no other evident short-term catalysts.
Company Overview. NCR (originally National Cash Register) is in business of manufacturing and servicing payment solutions like ATMs and self-service counters. It also used to run a Data Warehousing Business (Teradata) that was spinned off in September 2007, so the company is now a payment-only beast. What does revenue look like by division?
Segment Overview. Financial SelfService (ATMs) - $1.6B, 13% operating margin. Revenue has increased 15% in 2007, 11% netting out currency benefit. Growth has primarily been driven by Europe and Asia, U.S. is flattish at this point. Revenue growth was 2% in 2006, not nearly as great, driven by lower international growth.
Retail Store Automation. (POS terminals, bar-code scanners, self-service tech). $1B in revenue, 13% growth in 2007, 10% on constant currency basis, 20% growth in self-service counters. Self-service now is ~30% of segment sales, and has higher margin, which should positively affect the margins for the segment, which are currently only 4%.
Customer Services. Support for NCR and 3rd party products, $2B in revenue, 7% margin, 7% 06-07 growth (4% on constant currency).
Systemedia. Printer consumables and products including paper rolls for ATMs. $455M in sales with paltry 3% margins. Admittedly this one does sound like a bad business, just like anything having to do with paper. Revenue has declined 3% last year and this trajectory will probably continue.
Payment & Imaging. Check processing hardware and software. Checks are on the decline, and so is this business, only 3% margins and negative 8% growth 06-07.
Geography: Mix is rather favorable, Americas are 46% of sales, EMEA 36%, Japan 7% and Asia 11%. Asia and EMEA are two high growing segment, 11% and 8% growth last year in constant currency while Americas and Japan are flat.
Overall 2007 P&L looks as follows:
Revenue: 4.970B
COGS: 3.930
(however 70M are in restructuring charges)
Gross Profit: 1.050B (1.11 w/o restructuring)
SG&A:684M (8 in restructuring)
R&D: 137M (2% of revenues)
Income from Operations: 219M
(including other income): 232M (~310 w/o restructuring)
Tax: 61M
Net Income: 171M
Industry. NCR is the leading provider of ATMs globally with ~40% share of the market. Diebold is #2 with 35%, Wincor is #3 players. In the U.S. NCR and Diebold hold a commanding position with Wincor making inroads, in Europe the situation is somewhat reversed. Penetration in all global regions is low compared to the U.S.: 1300 ATMs per million people in U.S. vs 700 in Europe vs 60 in China. The penetration story in the developing world should allow NCR to have 10%+ growth in its EMEA and Asia segments for some time.
Self-checkout is also a penetration story: only 5% of all retail transactions in the U.S. are self-checkout, however some retailers like HD that aggressively push the initiative have 40%+ penetration, implying large room for growth.
What 2008-2009 holds. Management guided 3-5% revenue growth in 2008, and 2009 will probably be similar. What will happen to margins? Right now excluding all the restructuring expenses they're 6.3%. Given company leadership in the industry and strong competitive moat (huge installed base of devices), long-term margins should improve to 8%, which would result in around $1.8EPS given current revenues. However this expansion will have to wait a bit, as short-term margins probably will stay close to flat/decline slightly driven by weaker U.S. markets. All in all, expect EPS ~$1.5 in 2008, with EPS increasing to $1.8-2 in 2010, growth rebounding to healthy 7-8%. Assuming NCR, as the leader in its industry with attractive long-term growth prospects, should trade at 16-17x EPS multiple, slight premium to the market, the shares should go towards $30-35 range. Current price level provides a decent entry point, but it's even better if you're able to accumulate on any pullbacks towards $20, potentially driven by overall market weakness or not-so-great short term company results.
Risk: Prolonged financial industry downturn in the U.S. forces a multi-year pullback on capital spending
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