Diebold Turnaround And Upside Potential

| About: Diebold Inc. (DBD)

It's no secret that Diebold (NYSE:DBD) has been struggling of late, although the company, which is over 150-years-old, is taking a number of steps to right itself, including cutting costs, implementing changes more rapidly, putting new leadership in place, and moving up into more technological sectors such as software.

The good news about a stable company with the longevity of Diebold is it has successfully navigated every type of challenge that can be faced over the years, and the challenge it is facing now isn't one that is unique to the company or to the business it engages in.

Before we dig into the company, a final consideration to take into account is the firm is the only one that has announced and implemented 60 consecutive increases in dividends. That means that even in the most difficult of circumstances it has had the confidence it can continue to grow the company while rewarding shareholders.

One thing I personally like about Diebold against many other income opportunities is it has a decent record of growth, and has been moving up nicely since the early part of March 2013. I believe the company will continue that growth, as evidenced by the moving from its $27.61 close on March 4, 2013, to closing at $34.07 a share on July 3, 2013. That's a terrific move no matter which way you look at it.

The reason for the move was a change in leadership that shareholders obviously liked, and the plan laid out in its 1Q earnings report which showed clearly what the company was going to do to return to consistent growth.

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Source: StockCharts.com

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Source: Yahoo

Is it a Good Point to Enter Diebold?

There has been some recent coverage of Diebold in the mainstream media, and that I think has also added to the quick surge in the share price of the company, especially over the last week or so.

With that in mind, it would be instructive to carefully watch the stock if it starts to get more media coverage, as it will surely take off after it's understood it has been under pressure for a couple of quarters.

Diebold is one of those companies which offer a great income opportunity with its consistent dividend increases, and so to get in at a good point will obviously be more profitable than to wait until it garners more attention and the share price runs away on us.

Another factor is the 2013 profit outlook for Asia Pacific and Latin America is projected to be back-end loaded in the second half, so while the next earnings report isn't expected to be strong, afterwards we could see those regions help boost the performance of the company, which would further push the share price up.

The point is Diebold has flown under the radar, and contrary to big companies with decent dividends, can offer entry points you can't touch with the more popular firms. It's when a company is down but not out where the real opportunities lie, and that is where Diebold has been over the last couple of quarters, but is likely to strengthen as the year goes on.

Still, on a non-GAAP earnings basis guidance is for Diebold to be flat on the year or slightly down.

While it could be a slight risk, it may be worth waiting for a pullback if no new major media coverage occurs in the near term, as it has soared quickly in just four months. As of this writing the dividend on the company is $1.15 with a yield of 3.40 percent.

That still beats larger companies such as Coca-Cola (NYSE:KO), Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and McDonald's (NYSE:MCD), which are much more expensive and offer less yield. This is the beauty of a smaller company like Diebold and its relative obscurity.

Cutting Costs

In the transitional stage the company is currently in, it's imperative it reduce its cost structure, and to that end Diebold has a goal of cutting $100 million to $150 million out of it. Savings from that initiative is expected to be realized by the end of 2014 and complete savings completed by the latter part of 2015.

Part of the cost cutting includes lowering the headcount in the North American operations of the company by slashing 700 full-time positions. Included in those 700 cuts are those in corporate operations as well. Most of that process has already taken place, so results there will be seen sooner.

Another major step was the recent divestiture of its manufacturing facilities in Lynchburg, Virginia and Lexington, North Carolina. In a good move, Diebold sold it to a company they have been doing business with for some time and will continue to receive materials from those facilities.

The company has also taken steps to significantly reduce discretionary spend in a wide variety of areas. There are a number of other initiatives the company is rolling out to deal with the high fixed costs and resultant operating leverage challenges. In that area Diebold has fallen behind its peers.

Income Statement

Source: Ycharts

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Cash Flow Statement

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Balance Sheet

Source: Ycharts

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Getting More Nimble and Quick

One of the major reasons for removing the prior Diebold CEO and replacing him with Andreas Walter Mattes was because of the lack of a sense of urgency which resulted in the initiatives set forth by the company being slow in getting implemented.

With that change being completed, the practicals of jumpstarting the company are primarily related to reorganizing several areas of the firm as global functions. Those functions include service and supply chain operations, along with product development. Those steps are expected to empower the company to develop products quicker, boost operational excellence and leverage best practices. In the end it will also help to cut down on costs of operations across the regions it operates in.

As for investment in growth, it will target emergent markets as far as regions go, and within those markets the focus will be on electronic security, integrated services and transforming the brands of the company. The North American market for ATMs is saturated and isn't considered a growth area any longer.

The company says the change in focus on improving vital business processes will ensure when it does achieve gains that'll be sustainable.

Part of the change in processes is a flattening of a centralized business structure it developed earlier in 2013. That new structure is fully operational at this time and is already helping the company to be quicker in the actions it needs to take to improve the trajectory of the firm.

In order to manage the various new initiatives deployed, Diebold has created what it calls a transformation management office or TMO. Executives in that team will be part of "the governing structure and mechanisms required to ensure the execution of our key initiatives."

New Leadership

As mentioned earlier, the lack of a sense of urgency revealed there was a need for more of an entrepreneurial type to run the company, and the company got that when it hired its new CEO Andy W. Mattes, who formerly ran a $10 billion-a-year unit at Hewlett-Packard (NYSE:HPQ), which included 40,000 employees at the time.

The decision to hire Mattes was based on his software experience and services related to it, as well as being perceived as being very entrepreneurial in his outlook and actions, both of which Diebold needed in its new leader.

Software is considered one of the top growth areas of the company, and with quick growth and transformation a priority for Diebold, Mattes's experience and skills lend themselves strongly to the goals of the company in the near and long term.

The two major priorities of Mattes are to finish the cost-cutting measures quickly and to gain market share in the fragmented electronics-security business, which generated approximately $300 million in revenue in 2012, about 10 percent of the $3 billion in revenue generated by the company for the year.

Earlier in the year Diebold established the position of Chief Operating Officer, appointing George Mayes to that post. The reasoning there was because of the growth and increasing complexity associated with the international markets Diebold serves.

Mayes will also focus on increasing the speed of execution while maintaining discipline and accountability in its global operations.


Diebold is a small cap company in the midst of transforming itself into a global company offering a variety of products related to banking services and security. It's vastly overlooked as an income source, even though it has boosted its dividend for 60 years in a row.

I like the fact it has a strong board in place that is willing to take the steps to address the challenges faced by the company, and I like the moves the board made in hiring to fill the needed gaps to ensure a successful future.

Even though the company does face some near-term challenges, it is far from being in trouble, as evidenced by the fact it has guided for a minimum of $100 million in free cash flow for 2013, which the company says will be a flat year, and possibly may end slightly down. It says that cash flow is more than sufficient to continue to invest in the growth initiatives being launched by the company while sustaining its dividend.

Diebold is moving quickly to attain its cost-cutting goal, which will further release capital to grow the company. With expectations that will be completed in about a year-and-a-half, it won't be long before investors start pricing in the expected gains going forward.

Being heavily exposed to banking during the recent crisis didn't stop Diebold from continuing to boost its dividend, and that's a strength I believe the company will continue to have as it moves into the future. Income investors should take confidence in the extraordinary dividend history of Diebold, while looking forward to the company - which is a powerful brand in the markets it serves - to also provide significant growth over the long term.

With its history, focus, and proven ability to weather tough economic times, Diebold is definitely a company that needs to be considered when thinking of where capital can be placed for growth and income.

I believe Diebold has a good plan in place to cut costs, as well as a strong growth strategy. Combined it should provide solid returns for shareholders for many years to come. That and the relatively low share price in comparison to larger income stocks make it a very attractive company to invest in.

As for the short term, when the expected weak numbers for the next quarter come in, it could pressure the share price downward, resulting in a better entry point. But as always, the numbers may be better than expected, so the stock could start to run. If that's the case, the projected stronger second half could result in paying more for Diebold than at its current levels. It's something to consider when making a decision.

It looks like the strong recent run will require a pullback, but nothing is certain. Waiting to see if it pulls back before the next earnings report probably wouldn't be as detrimental as waiting until after the report if the numbers are stronger than estimated.

Diebold is a long-term play, and getting in now, while maybe not the best possible entry point, is still far better than the majority of major companies offering dividends that aren't as large as the dividend offered by Diebold, but much higher in share price.

Eventually, if the company successfully implements its strategy, I think within three years or so it could push the $50.00 a share mark. That and the growing dividend are a compelling reason to seriously look at Diebold as an income and growth play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.