NCR is more than just a hardware manufacturer

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NCR Corporation (NCR), the ATM and point-of-sale manufacturer, reported strong results on Thursday with FX neutral revenue growth of 9% and adjusted EPS growth of 47%.  POS sales were strong enough to more than offset a small decline in ATM sales.  However the company has moved on from being just a hardware manufacturer with accounting software and services now accounting for 28% of revenue and a remarkable 78% of operating income.   Importantly, this segment saw 8% growth with gross margins of 51.3%.

Despite the strong results, the stock fell by 8.3% on Friday as the market was disappointed by lower guidance on a GAAP basis which was caused by the repurchase of preferred shares in March in excess of the carrying value.  The preferred stocks formed part of a 2015 Blackstone investment that with hindsight looks like a bad deal for NCR.  However with $776 million of preferred stock still outstanding compared to cash of $400 million and annual operating cash flow of $850 million it does not change the overall dynamics of the investment thesis.

The company has raised non-GAAP guidance by $0.05 to a range of $3.32 to $3.42  which would represent a 12% YOY increase at the mid-point.  This looks conservative given 8% growth in its software segment and 50% operating margins.  That alone should drive earnings growth closer to 20%.  However the stock looks cheap even using the more conservative guidance and Friday’s drop provides an excellent entry point, priced on $40.94 with a TTM PE of 13.6 and forward multiple of 12.1.

Risk Disclaimer: This article does not constitute a recommendation to buy or sell. Investing in stocks or other securities and derivatives is a high-risk activity and not suitable for everyone. It is strongly recommended that individuals should consult with a SEC-registered investment adviser prior to making any investment decisions.

Disclosure: The author holds no positions in any of the stocks mentioned nor has any intentions to initiate any in the next 72 hours.

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