What they do
NCR Corp. (NCR, Financial) is a provider of solutions designed to allow businesses in the financial services, retail, hospitality, travel and telecommunications and technology industries to deliver integrated and personalized experience to consumers across physical and digital commerce channels.
The company's offerings include a portfolio of platform software, industry-focused hardware and smart-edge devices, including automated teller machines, point of sale terminals and devices and self-service kiosks and a complete suite of consulting, implementation, maintenance, support and managed services. Industry peers include Hewlett-Packard (HPQ, Financial) and International Business Machines (IBM, Financial).
Business acquisition highlights
In July 2019, the company completed its acquisition of D3 Technology Inc., a provider of online and mobile banking for the large financial institution market, for approximately $84 million. The acquisition further expanded the company's digital banking strategy as it extends its market share in large domestic banks and international banks.
In December 2019, the company completed its acquisition of Zynstra Ltd., a provider of edge virtualization technology, for approximately $134 million. The deal further expanded the company's digital retail strategy as it further enhances its next-generation store architecture.
Short-term target
My current short-term target for the stock is $22.66 with an initial trailing stop set at $20.02. Based on a recent price of $20.32, upward price movement will find resistance at $22.06 and again at $23.91, with final resistance found at $24.32. Downward price movement will find support at $19.18 and again at $18.15, with final support found at $16.31.
One-year growth price target
My one-year growth price target is actually a price target range, determined by adding year-over-year earnings growth to the prior year annual dividend yield and dividing the result by the current annual price-earnings ratio.
For this stock, my current one-year growth price target range is $25 to $32.
Volatility adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock's volatility. A beta ratio of less than 1 means that the security's price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security's price will be more volatile than the market.
Based on my current beta ratio of 1.62, my volatility adjustment to recent pricing is $8 per share, making my current volatility adjusted price $13.
Quality of earnings
A company's earnings can be impacted by a variety of sources unrelated to the company's current day-to-day operations. Discontinued operations, tax refunds, depreciation and impairment, for example, may distort a company's operating income and, consequently, its fair value. Investors should always explore the sources of a company's operating income to better understand potential valuation impacts.
Of the company's $4.09 in earnings per share, $2.12 came from some combination of other sources, income taxes, interest, minority interests or discontinued operations.
Key performance indicator rating
I use key performance indicators as a barometer to measure the effectiveness of management. Several of the metrics I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Based on a 0 to 105 scale, my KPI for this company is 50.
Five-year growth of $10,000
Had you invested $10,000 in this company six years ago (Dec. 31, 2014), you would have received 353 shares of stock with a cost basis of $29.14. Had you held the stock for five years and then closed your position (Dec. 31, 2019), you would have closed at $35.01. During that holding period, you would have collected $0 in regular and special dividends, and your initial investment would have returned to you $12,014, a gain of 20% excluding regular and special dividends.
Annual shareholder return
I calculate annual shareholder return by subtracting the stock price at the close of business on the last day of a company's fiscal year from the stock price at the start of business on the first day of the company's fiscal year, plus any dividends paid during that period, and then dividing the result by the opening stock price on the first day of a company's fiscal year.
For fiscal 2019, the company spent $3.09 per share buying back company stock, paid a common stock dividend of $0 per share and had year-over-year annual price appreciation of $11.93, which created a year-over-year annual shareholder return of 52%.
Over the prior five-year period, the company spent an average of $2.86 per share buying back company stock, paid an average annual common stock dividend of $0 per share and had an average annual price appreciation of $-2.20, which created an average annual shareholder return of -5%.
Cost of common equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the 30-year Treasury yield to the beta ratio for the stock multiplied by my default equity risk premium.
My cost of common equity for this stock is 6.52%.
Insider transactions
The Securities and Exchange Commission classifies insiders as "management, officers or any beneficial owners with more than 10% class of a company's security." Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their "insider" knowledge.
Over the past 12 months, the company has recorded 99 insider trades involving 1,722,981 shares. Of those insider trades, 52 were buys involving 1,217,224 shares and 47 were sells involving 505,757 shares, creating an insider buy to sell ratio of roughly two to one.
The year-over-year numbers
There are many year-over-year numbers for investors to focus on. But to me, there are only a handful that have any significant meaning, and so those are the numbers that I highlight in this space. Please remember these are year-over-year numbers.
For fiscal 2019, revenue growth increased 8%, earnings increased 296%, free cash flow increased 127%, debt increased by 24% and the company's return on invested capital was 16%. Additionally, the company's annual operating rate, which I calculate by adding operating expenses to the cost of goods sold and dividing the result by net sales, was 95%. The company's operating cash flow ratio, a measure of how well a company is managing its cash flow, was 1.17.
Current price ratios
Investing requires effort. Value investing requires patience. Stock prices require consideration. As a way to help determine if a company is worth my investment effort, patience and consideration, I use several price comparison ratios. For this company, my pric-earnings ratio is 5, my price-book ratio is 2, my price to tangible book value is -1, my price-to-debt ratio is 1 and my price-to-free cash flow ratio is 3.
Enterprise and equity values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company's ability to generate cash is to compare the enterprise value to the equity value. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt.
For this company, my enterprise value (market cap plus debt less cash) is $47 and my equity value (market cap plus cash less debt) is $-6, making my enterprise-to-equity ratio -0.13.
Risk-reward ratio
I determine my risk-reward ratio by subtracting my current terminate target from a recent price and then dividing that result by my initiate target less a price fluctuation variable of 20%. What I am looking for with this ratio is a value of 5 or greater. My risk-reward ratio for this stock is 7.
Prior five-year averages
My average valuation for the prior five-year fiscal period was $24. The stock price during that time period averaged $27, earnings averaged $1.49 per share and the average price-earnings ratio was 18.
Fair value investing
It is important to remember that the current market price of an equity is the price negotiated between a willing buyer and a willing seller. This market price is not the fair value of the associated company, but the negotiated price of a single equity trade.
The basic investing tenet for a fair value investor is price determines return. As such, it is important to have some understanding of the value of the company as an ongoing concern and to develop a strategy that, with current value in mind, will allow investment in that company at some reasonable discount to current pricing.
My most recent fair value estimate for the stock of this company as an ongoing concern is $33. This estimated fair value forms the basis for my target price as shown on my worksheet.
In conclusion, NCR is undervalued. In addition, the stock is currently trading at levels below my most recent $23 initiate target. Please See Linked PDF Worksheet.
My disclaimer
I am a long-term, buy and hold investor, practicing a value investing philosophy. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company's most recent Annual Report on Form 10-K.
Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.
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