Talk about the tail wagging the dog. Election Systems makes up 8% of Diebold’s (NYSE:DBD) sales and 80% (or more) of its headaches. Although the segment nearly tripled in size (contributing 5% growth to the overall company), one has to wonder if it is all worthwhile. With payment for many election systems tied up while partisans dispute the machine’s effectiveness (note to management: if you want to compete selling voting machines, don’t skew your political donations to one party), the cash flow has deteriorated despite rising revenue and net income.
A recent study by Princeton University that claims the panel door protecting the memory card on Diebold’s AccuVote-TS voting machine can be opened with a hotel mini-bar key has triggered howls of outrage all over the blogosphere. And citizen groups in California and Wisconsin have filed lawsuits to block the use of Diebold voting machines in the upcoming midterm Congressional elections. These headaches aside, Diebold President and CEO Thomas W. Swidarski can take solace in the fact that his company is on a tear right now selling ATMs to mainland Chinese banks.
Thanks to recent big orders from the Bank of China, China Construction Bank, and the mainland’s national post office which also does banking, Diebold has clawed its way to No. 1 on the mainland with a 30% market share. That is just ahead of ahead of rival NCR (NYSE:NCR) and 15 or so Chinese domestic rivals. “Chinese banks are preparing to compete on a global basis,” says CEO Swidarski. “They are looking at how to automate their retail operations.”
Diebold is trading at a hefty enterprise value of 44x it’s free cash flow, compared to just 13x for NCR. However, we estimate that without the election systems, segment free cash flow would improve and reduce the multiple for Diebold to just 19x. It would still be higher than NCR’s, but the difference would be much less. Plus, management would be able to focus on running the business rather than dealing with outraged partisans.
Now if only we could get the dog’s tail snipped…
DBD 1-yr chart: