Cardtronics: Aggressive Accounting And Secular Decline Drive 40-70% Downside
- Cardtronics, an owner and operator of ATMs, is a levered bet on paper currency usage, which is in secular decline. Yet it trades at a rich valuation (26x 2014 EPS).
- Aggressive depreciation accounting inflates reported earnings by 50-70%. Cardtronics depreciates ATMs over ~9 years; peers use 5 years. ATM upkeep and obsolescence are very real economic costs.
- Serial acquisitions have boosted results, but returns are declining as new ATMs - typically situated in locations with less foot traffic - have been far less profitable than legacy ATMs.
- 7-Eleven is Cardtronics's largest customer (24% of revenue, ~40% of earnings). This contract is at immense risk of being undercut by Seven Bank, a 7-Eleven sister company.
- Based on the valuations of comparables as well as our DCF analysis, we believe CATM should trade at $9-$19, 40-70% below the current stock price.