| 2017 | 2018 | ||||||
| Price: | 39.25 | EPS | 3.40 | 3.80 | |||
| Shares Out. (in M): | 157 | P/E | 11.5 | 10.4 | |||
| Market Cap (in $M): | 6,166 | P/FCF | 11.5 | 10.4 | |||
| Net Debt (in $M): | 2,927 | EBIT | 915 | 1,000 | |||
| TEV (in $M): | 9,093 | TEV/EBIT | 9.8 | 9.1 | |||
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NCR is evolving from a hardware to a software driven company which will help drive higher margins and growth over the next several years. We believe it is misunderstood and overlooked and its valuation does not reflect the transformation so far. Trading at just 10-11X Free Cash Flow, NCR believe the company can re-rate as it continue to executes on its strategy. NCR believe shares can trade from $39.25 to $50+/share over the next twelve months.
General Description
NCR was last on VIC as a short back in 2014. The short thesis is understandable. Questionable accounting, secular headwinds, bad capital allocation, poor management decisions etc. Some of these things are still present today, the stock has barely moved up during the past few years. However today, we believe that the company is showing signs of its execution but its valuation still reflects all the negative past.
Why Invest Now?
NCR believe that the stock is undervalued and still suffers from the negative sentiment from over the past few years. Furthermore, NCR believe that the stock is also temporarily depressed over an overhang of stock that Blackstone owns and will most likely be selling over the cNCRse of the next year. In December 2015, NCR sold a convertible preferred to Blackstone after a strategic review of the company. It was announced earlier this year the Blackstone would sell 49% of its holdings. NCR believe the combination of these two factors are causing the stock to be depressed, hoNCRver these factors could very easily be corrected over the next 12 months.
Company Description
NCR Corporation (NYSE:NCR) is a leader in omni-channel solutions, turning everyday interactions with businesses into exceptional experiences. With its software, hardware, and portfolio of services, NCR enables nearly 700 million transactions daily across retail, financial, travel, hospitality, telecom and technology, and small business. NCR solutions run the everyday transactions. For example, NCR sells self-service and assisted-service solutions, serving customers globally in the financial services, retail, hospitality, travel and telecommunications and technology industries. This includes software and hardware solutions for ATMs and bank branches, retail and hospitality point-of-sale applications and devices, and selfservice kiosks and software applications. The Company complements its product solutions by offering a complete portfolio of services to support both NCR and third-party platforms. It also resells third-party networking products and provides related service offerings in the telecommunications and technology sectors.
Product Segments
Earnings Model
| Revenue | 2017 | 2018 |
| Hardware | 2400 | 2450 |
| Software | 1955 | 2080 |
| Services | 2350 | 2425 |
| Total Revenue | 6705 | 6955 |
| Cost of Revenue | 4650 | 4750 |
| Gross Profit | 2055 | 2205 |
| S G & A | 900 | 930 |
| R & D | 240 | 250 |
| Total Opex | 1140 | 1180 |
| Total Op Income | 915 | 1000 |
| Interest | 165 | 165 |
| Other | 25 | 25 |
| Total Pre Tax | 725 | 810 |
| Tax | 192 | 215 |
| Net Income | 533 | 595 |
| EPS | 3.40 | 3.80 |
| D & A | 210 | 215 |
| Stock Based Comp | 70 | 70 |
| EBITDA | 1190 | 1280 |
| Capex | 275 | 280 |
| Free Cash Flow | 533 | 595 |
The driver of earnings for NCR over the next several years will be in software. That segment is the fastest growing and carries a margin 2X+ over services and hardware at over 50% operating margin.
Valuation
Valuing NCR is not totally straightforward which is a major reason for its mispricing. It is typically known as a hardware company who undergoes cycles driven by financial services capital spending, retail spending and a headwind of less cash usage. HoNCRver, the company has been successfully pivoting away from being solely dependent on these factors. NCR believe that NCR is a hybrid of a hardware company and a software and services company. At the low end, NCR believe the stock should trade at 7x EBITDA and 8X earnings (Hardware type multiple), and 10X EBITDA and 15X earnings (software multiple).
Comps are Verifone, PAY; First Data, FDC, Diebold and Nixdorf (DBD)
NCR believe that NCR should trade at 9X EBITDA or about 14X earnings. This translates into $54/share. or 37% higher.
Competition
NCR is the second largest player in ATMs behind Diebold and Nixdorf. It also competes against other technology providers depending on product and end market such as HP, Fujitsu, Honeywell, Fidelity National Information Systems and Nautilus Hyosong.
Risks
Competition from Diebold Nixdorf
Blackstone selling pressuring stock price
Failure to execute on software and cloud growth initiatives
Continued Execution of growing software and cloud revenue
Elimination of Blackstone overhang this year
Stock Repurchases
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