Diebold (NYSE:DBD) builds, sells, and services ATMs, security products and systems, and computerized voting machines. About 67% of revenues are derived from ATM sales and service.
Electronic voting machines account for about 5% of other revenues with contributions from safes, vaults and surveillance systems at approximately 24%. Non-US sales are about 50%.
After turning down an unsolicited buyout offer from United Technologies (NYSE:UTX) last year Diebold shares held up well until the general market contraction last fall. They dropped from over $40 on the buyout offer to about $22.50 last November. After a rebound early this year they hit a new 14-year low on March 30, 2009 at $18.80.
A huge third quarter 2008 installation of ATMs in Chinese banks saw a 150% jump in year-over-year earnings and led to a record full-year EPS of $2.66. Excluding that one-time extra profit they earned about $1.53/share. Consensus views for 2009 and 2010 are now running $2.19 and $2.64 respectively.
That makes Diebold’s P/E a very low 10.6x this year’s and < 8.7x next year’s projections versus their 10-year median multiple of 19x.
DBD has a long history of dividend increases. I fact, the recent increase from $0.25 to $0.26 quarterly marked the 55th straight year of improved payouts. Today’s current yield of 4.56% marks the highest level in decades for DBD’s shareholders. The dividend looks quite secure.
Diebold management let their existing anti-takeover ‘poison pill’ expire in February making a renewed takeover attempt a possibility for the future.
Morningstar gives a ‘fair value’ of $32 and assigns DBD their highest, 5-star rating.
Value Line rates DBD’s financial strength as ‘A’ and notes their ‘earnings predictability’ is in the 70th percentile (with 100th being best).
As of December 31, 2008 Diebold held $392 million in cash and short-term investments against total debt of about $605 million.
Diebold holds about 66% of the US market for ATMs and about 33% of global market share. It has good prospects for foreign sales growth with its recent expansion into China and Latin America. More and more domestic venues are mandating electronic voting machines adding another avenue for growth.
Even a partial valuation rebound to a still below-normal 14 multiple would bring a target price of $30.24 by year end. From today’s closing price of $22.82 that’s a 32.5% gain. Add in the three remaining 2009 dividends and you got a total return potential of almost 36%.
Here’s a nice low-risk play that doesn’t even need that big a move to make great returns:
……………………………………..…… Cash Outlay ……....… Cash Inflow
Buy 1000 DBD @ $22.82 ……….....…. $22,820
Sell 10 Jan. $25 calls @ $2.30 ……………………………....….. $2,300
Sell 10 Jan. $25 puts @ $5.00 ……………………………....…... $5,000
Net Cash Out-of-Pocket ………...…….. $15,520
On expiration date (Jan. 15, 2010) if DBD has risen to $25 or better (up at least 10%) from our starting price:
- Your $25 calls will be exercised.
- You will sell your shares for $25,000.
- Your $25 puts will expire worthless (a good thing for you as a seller).
- You will have collected $780 from three quarterly dividends.
- You will have no further option obligations.
- You will hold $25,780 for your original outlay of $15,520.
That’s a best case scenario profit of $10,260 / $15,520 = 66% in less than 10 months on shares which only had to rise by 10%.
What’s the risk?
If Diebold stays under $25 through January 15, 2010:
- Your $25 calls will expire worthless.
- The $25 puts will be exercised.
- You will be forced to buy another 1000 shares and to lay out an additional $25,000 cash.
- You would have collected $780 in yield.
- You would end up with 2000 shares of DBD.
What’s the break-even on this whole trade?
On the original shares it’s the $22.82 purchase price less the $2.30 call premium = $20.52 /share.
On the puts it’s the $25 strike price less the $5 put premium = $20 /share.
Your break-even is the average of $20.52 + $20.00 = $20.26 /share.
That $20.26 price is lower that the lowest trade in any year from 2000 right through 2008. It would also represent a forward P/E of < 9.4 and a current yield of 5.13% on your 2000 share holding.