The Long Case for NCR: Leader in Payment Solutions

NCR Corporation (NCR) stock has been bruised recently, along with anything else financial-related. While the CDOs, CLOs and other mysterious abbreviations are not lurking on NCR's balance sheet, the revenue for the company is expected to hurt in 2008 as its main customers, banks, cut on capex in an attempt to hoard some cash. This fear has driven the stock down from the highs of $28 in November to $21 in March, although since then it has bounced to $25. Despite the run-up, at current price the stock is a good buy, although substantial gains might have to wait until improving fundamentals in 2009. That is unless NCR is snapped up by a major industrial player, just like Diebold was by UTX, in which case returns will be that much richer.

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 spun off in September 2007, so the company is now a payment-only beast. What does revenue look like by division?

Segment Overview

Financial Self Service (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. This is also a penetration story: only 5% of all retail transactions in the U.S. are self-checkout, however some retailers like Home Depot (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 a 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.

Disclosure: Author holds a long position in NCR

Comments

[OptionTrader]

Interesting. cgi.ebay.com/ws/eBayIS...

[ncr stockholder]

expansion of self service (what you lump into financial ATM), kiosks, etc plus growth in services should assist NCR in the days ahead.