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NCR Has Potential Despite Headwinds

The historic ATM company has diversified into additional digital technologies, moving away from only cash transactions

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May 11, 2022
Summary
  • NCR has a history dating back to 1884 as the original National Cash Register company.
  • The company has been mostly successful in transforming itself to digital technologies and other related services.
  • NCR is under-earning to its full potential due to unprecedented higher input costs and wage inflation.
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The recent market downturn has already produced a number of stocks that appear to be cheap. That means cheap on a real earnings or cash flow basis, not a price-sales ratio on a company that is years away from generate positive net profits. One of the new members of the single-digit price-earnings club us NCR Corp. (

NCR, Financial). The company provides hardware, software and services to various industries such as banking, retail stores and restaurants. Key products that are part of its historical legacy include ATM machines and self-checkout technologies at retail stores.

Originally known as National Cash Register, the company was incorporated in 1884 and has been largely successful at transforming its business to a recurring revenue, software and services type technology provider that runs stores, restaurants and self-directed banking service for bank customers.

Segments and products

The banking segment provides solutions to customers in the financial services industry and involves software, services and hardware. NCR has a digital banking back-end solution to helps banks and credit unions offer their services online or in a mobile setting. The company manages the Allpoint retail-based ATM network, which can also be used as a private-label network using a bank's own branding.

The retail division provides mostly software-led solutions to customers in the retail industry who use digital technologies to connect retail operations end-to-end to integrate all aspects of a customer’s operations. This includes indoor and outdoor settings from point of sales to payments, inventory management, fraud and loss prevention applications, loyalty and consumer engagement. This segment also includes hardware such as grocery store self-checkout machines.

The hospitality segment provides technology solutions to customers in the hospitality industry, which includes table-service, quick-service and fast-casual restaurants of all sizes. The portfolio includes cloud-based and cloud-enabled software applications for point-of-sale, back office, payment processing, kitchen production, restaurant management, e-commerce and consumer marketing and loyalty. There is also a hard component in this segment, which includes POS terminals, handheld checkout devices and other restaurant-related needs.

The telecommunications and technology division offers managed network and infrastructure services to enterprise clients across a wide range of industries through direct relationships with communications providers and technology manufacturers. Customers use these services to help them reduce complexity, improve cost efficiency and enable global geographical reach. The company delivers expert-level professional, field and remote services for modern network technologies, including software-defined wide area networking, network functions virtualization, wireless local area networks, optical networking and cloud computing.

Recent acquisitions

In 2021, the company completed the acquisition of major competitor Cardtronics in a deal that was valued at approximately $2.5 billion. According to NCR, this will accelerate its NCR-as-a-service concept by adding the Allpoint network to complement its existing payments platforms. Cardtronics operated approximately 285,000 ATMs machines at the time of the acquisition.

In early 2022, NCR completed the acquisition of LibertyX in order to enable the company to provide a digital currency solution to clients. This includes buying and selling cryptocurrency, conduct cross-border transactions and accept digital payments at various online and physical stores.

Financial review

First-quarter revenue was strong for the company, increasing 21%. However, almost all of that was due to acquisitions made in 2021. Operating income declined significantly due to ongoing Covid-19 issues, the Russia-Ukraine conflict and much higher input cost inflation. Operating income was $33 million compared to $101 million in the prior-year period and NCR recorded an earnings loss of 28 cents per share, which was down from earnings of 19 cents in the year-ago quarter. The increase in recurring revenue was a highlight, which rose 35% and now represents 63% of total revenue. The negative issues mentioned above caused a reduction or delay in revenue of $90 million and a reduction in Ebitda of more than $70 million.

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The company took on debt to fund the Cardtronics acquisition, increasing the total (excluding capital lease obligations) in 2021 to $5.5 billion from $3.3 billion at the end of 2020. At the end of the first quarter, debt was still approximately $5.5 billion. With approximately $1.5 billion in Ebitda expected in 2022, the company’s leverage ratio is slightly elevated at 3.4 times.

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Strategic Review

NCR has been undergoing a comprehensive strategic review process recently, which will evaluate a full range of alternatives to enhance shareholder value. Those strategic alternatives could include dispositions of important businesses or assets of the company or a spinoff, merger or sale of the entire company. Additionally, this could include other structural changes, including changes to branding or geographic footprint or other transactions or alternatives. The board-led strategic review process is ongoing and the company has not set a timeline for when this review will end.

However, on April 29, an article from DealReporter cited sources claiming that NCR has attracted buyout interest from more than six parties, including Apollo Global Management (

APO, Financial). NCR did not comment in response to the article and there has been no confirmed knowledge of any potential deal that is close to being transacted.

Valuation

As a member of the club who has suffered major cost input and critical shortage of manufacturing supplies such as semiconductor components, NCR may not be earning up to its full potential. Analysts' earnings estimates for 2022 are approximately $2.80 per share, which still puts the company at a low price-earnings ratio relative to the market. If these negative conditions alleviate next year, the company could earn around $3.50 or so, which puts it in the single-digit price-earnings category.

Guru trades

Gurus who have purchased NCR stock recently include Keeley-Teton Advisors and

Joel Greenblatt (Trades, Portfolio). Gurus who have reduced their holdings include Steven Cohen (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).

Final thoughts

NCR is one of the many companies to succumb to the current negative effects of input cost inflation and wage pressures. The question is if it can survive over the long-term and generate positive and increasing earnings. The company appears to be undervalued based on long-term growth plans and strong market positions in the banking and electronic payments industries.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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