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For investors, cash-machine makers could be cash machines

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Bitcoin may or may not be the world's next great currency, but we do know that credit cards, PayPal, and all sorts of electronic transfers of money are going gangbusters. It all adds up to a rather dour outlook for good, old-fashioned cash.

That seems to extend to NCR Corp. and Diebold Inc., two companies that make ATMs, the machines dispensing all that supposedly endangered cash.

The relatively small number of analysts covering the two are mixed, at best, on the names, for somewhat understandable reasons. NCR missed sales expectations and issued disappointing 2014 profit guidance in its recent earnings report, sending the shares down. Diebold is in the early stages of a recovery that management calls its "crawl, walk, run" plan. (Would you recommend the stock of a company that admits it's currently "crawling"?)

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While NCR and Diebold may underwhelm in the short term, their longer-term prospects are brighter. Both companies have robust, growing businesses that complement their ATM divisions. And, in all likelihood, investors are unfairly discounting the companies for their strong link to the cash economy.

"People lump ATM makers in with a lot of other companies they consider old tech and assume the world will be moving 100 per cent to new tech in short order," says Gil Lauria, an analyst for Wedbush Securities. "In my mind, that's not the case here.

"Cash, contrary to popular belief, is not ending."

In the United States and other Western economies, he says, it's declining as a percentage of total consumer spending, but still growing as economies grow. In emerging markets, cash usage is still growing, and it's used for 80 to 90 per cent of transactions, he says. "So cash isn't ending, and it isn't going to drag these guys down."

NCR, once upon a time, had the word "cash" in its name: It was National Cash Register Co., founded in Dayton, Ohio, to sell mechanical cash registers. Well more than a century later, the only thing the same is that its products are still found in most places where consumers part with – or obtain – their money.

The financial services segment, which includes ATMs as well as other payment-processing hardware and software, makes up more than half the company. Its retail solutions and hospitality divisions offer point-of-sale terminals, kiosks, for airlines and hotels, and sales-tracking services for restaurants and entertainment companies.

NCR posted a 2-per-cent year-over-year revenue gain in its fourth quarter, but the mix is telling: Financial services declined 7 per cent, while retail solutions gained 9 per cent and hospitality reported sales gains of 17 per cent.

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Mr. Lauria says the hospitality segment is where NCR has best bundled hardware and software solutions, and the company intends to apply that framework to the entire business.

Paul Coster, an analyst with JPMorgan, says NCR exited 2013 with $1.27-billion (U.S.) of revenue from software and services, up 40 per cent from the prior year, owing largely to acquisitions. "This is a higher-margin business, exhibits growth and visibility, attributes that should command a higher multiple."

NCR, for now, does not. At recent prices around $33, it trades at a little more than 10 times Mr. Coster's estimate of 2014 earnings. Multiples for companies that have similar software businesses, such as Fiserv and Fidelity National, suggest that investors undervalue NCR's efforts. Other tech companies with similar leverage to NCR, he observes, trade for an average P/E twice as high.

So, is it that skepticism about ATMs? Mr. Coster, who has a price target of $48 for NCR, says investors are surprised that NCR is forecasting growth for its cash machines in 2014. He is not surprised; he thinks banks are continuing to change their branches, shifting customers away from tellers for their transactions, and the continued stabilization of U.S. banks after the financial crisis could lead to more capital spending.

That should benefit Diebold, too, but that company is in an interesting place. ATMs make up more than three-quarters of its business, but it also has a corporate-security division. It has settled a Foreign Corrupt Practices Act case in the United States, is squabbling with tax authorities in Brazil, and is continuing to cut costs. It lost money in 2013, but analysts are forecasting a return to profits in 2014.

Investors, too, are expecting a turnaround, giving the shares a forward price-to-earnings ratio in the low 20s. They seem to accept the management timetable that Diebold will be leaving its "crawl" stage in 2014 for the "walk" portion of its transformation. ("Run," in which the company "accelerates and grows," starts some time in 2015, although it issued 2014 guidance Thursday for low single-digit growth in sales.)

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Famed investor Mario Gabelli, who has owned the shares for some time, recommended the stock in the annual roundtable held by U.S. investing newspaper Barron's. He sees the company earning $2.75 a share, more than twice 2012's profits, if the makeover works. "If it works, the stock could double … Here is a company with a $2-billion market capitalization, no balance-sheet problems, and a great brand and image, in the early stages of a turnaround."

Mr. Lauria of Wedbush is one of those analysts who is cautious because of the short-term outlook for the companies, so he has "neutral" ratings on the shares.

"My ratings have a lot to do with what I perceive investors are expecting: faster growth, in NCR's case, and faster recovery, in Diebold's case, than I think will actually transpire," he says. "But I think both companies are going to do well. NCR will grow all of its businesses this year and accomplish its goal of having more of a software-driven business. I think Diebold will successfully turn its business around, fix its cost structure, reinvest in products and get those products going next year and the year after."

It sounds as if the two could, in the longer term, be cash machines.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More


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