NCR: Finding Value in a Pivot

NCR Corporation              NYSE:NCR          Current trading price: $41.87 USD Overview: Founded in 1881, NCR is the market leader hardware and software for point of sale (POS), self check out (SCO), and ATMs for the banking, retail, and hospitality industries. Half of their revenue is from the banking segment, 34% retail, and 11% hospitality. They have a market cap of 5 Billion USD. They sell internationally but are mainly base in the US. Their recent plan has been focused on servicing in order to boost recurring revenue. Industry outlook: The POS software space is projected to have a CAGR of 10.1% from 2020-2027, the majority of the growth will be driven by cloud POS management systems and more mobile solutions. Both of which are points of expertise of NCR. They are the market leader in POS software and have a suite with mobile POS, hardware, and software components bundled for one seamless platform. The industry is also moving towards cashless transactions (through credit/debit cards, apps, QR codes) and a larger focus on cloud analytics and inventory management. Their next biggest competitor is Diebold Nixdorf, which has a market cap of 1.32 billion USD (3.75 times smaller than NCR). Investment thesis: 1. Servicizing and backend mobile software – management estimates a revenue growth of 10-15% CAGR for the digital banking segment as well as 8-10% CAGR for the hospitality sector. Servicizing transition is expected to be fully priced in by 2024. 2. Superior market position – pricing power, IT knowledge, r&d initiatives, higher margins, mission critical software/hardware, scale, patents on SCO and other hardware. 3. Adoption of self checkout fueled by Covid – expected to grow at a 13.3% CAGR until 2027. With 47% of the market only in North America, large runway for international expansion Risks: 1. Debt eats into FCF and limits R&D spend, limiting future growth. And/or NCR uses shelf offering to dilute shareholders to pay debt. Approximately 550 million USD due each year from 2024 to 2030. With 509 million USD cash EOY 2019 and 338 in 2020. Mitigation: higher margins and continued focus on servicing recurring revenue will steady cashflows, allowing more to paid down on debt and less need to exercise the shelf offering. This combined with the pricing power, will allow them to push costs on consumers to increase cash flow. 2. Disruption from fintechs such as Square (NYSE:SQ) will reduce market share and lower margins. Mitigation: NCR has a larger platform, which allows small and medium enterprises to upgrade their POS system when they expand, which will lower costs in the long run. (square benefits small customers) SME only represents 5% of NCR’s retail customers. NCR silver is also a similar product/service to square. Catalysts: 1. Cyclical uptick from Covid will drive capex of customers and boost revenues. – this is not priced into management’s guidance for 2021 (Morgan Stanley investment call) 2. Cardtronics acquisition – adds to installed base, can cross sell with software and accelerates 80/60/20 strategy. – expected to add to eps until EOY 2022. I believe that the street is underestimating cross selling and ATM value. Valuation: NCR trades at an EV to EBITDA multiple of 11x, compared to a comps average of 15.4x. Through a DCF analysis, my price target is $51.01. This represents an upside of 21.8%. This is based on assumptions of EBITDA margins (increasing from 15% to 20%), revenue growth (7% in 2021 and decreasing to 5% by 2025), and recurring revenue guidance by 2025. This is conservative based on NCR’s 80/60/20 plan to have 80% software revenue, 60% recurring revenue, and 20% Adjusted EBITDA margin by 2024. This will result in approximately 4 billion in FCF generated from 2021-25 and will be used to pay or re-finance debt. Bibliography BusinessWire. (2021, 03 15). Retrieved from NCR and Cardtronics Announce Definitive Acquisition Agreement at $39.00 Per Share: https://www.businesswire.com/news/home/20210125005452/en/NCR-and-Cardtronics-Announce-Definitive-Acquisition-Agreement-at-39.00-Per-Share Grand View Research. (2021, 03 15). Retrieved from Self-checkout Systems Market Size, Share & Trends Analysis Report By Components (Systems, Services), By Type (Cash Based, Cashless), By Application, By Region, And Segment Forecasts, 2020 - 2027: https://www.grandviewresearch.com/industry-analysis/self-checkout-systems-market NCR Investor Relations. (2021, 03 15). Retrieved from NCR: https://investor.ncr.com/events-and-presentations/events By: Mitchell Switzer

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Apr 25, 2021

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NCR Corp.

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NCR: Finding Value in a Pivot

bullish

NCR Corporation              NYSE:NCR          Current trading price: $41.87 USD

Overview: Founded in 1881, NCR is the market leader hardware and software for point of sale (POS), self check out (SCO), and ATMs for the banking, retail, and hospitality industries. Half of their revenue is from the banking segment, 34% retail, and 11% hospitality. They have a market cap of 5 Billion USD. They sell internationally but are mainly base in the US. Their recent plan has been focused on servicing in order to boost recurring revenue.

Industry outlook: The POS software space is projected to have a CAGR of 10.1% from 2020-2027, the majority of the growth will be driven by cloud POS management systems and more mobile solutions. Both of which are points of expertise of NCR. They are the market leader in POS software and have a suite with mobile POS, hardware, and software components bundled for one seamless platform. The industry is also moving towards cashless transactions (through credit/debit cards, apps, QR codes) and a larger focus on cloud analytics and inventory management. Their next biggest competitor is Diebold Nixdorf, which has a market cap of 1.32 billion USD (3.75 times smaller than NCR).

Investment thesis:

1. Servicizing and backend mobile software – management estimates a revenue growth of 10-15% CAGR for the digital banking segment as well as 8-10% CAGR for the hospitality sector. Servicizing transition is expected to be fully priced in by 2024.

2. Superior market position – pricing power, IT knowledge, r&d initiatives, higher margins, mission critical software/hardware, scale, patents on SCO and other hardware.

3. Adoption of self checkout fueled by Covid – expected to grow at a 13.3% CAGR until 2027. With 47% of the market only in North America, large runway for international expansion

 

Risks:

1. Debt eats into FCF and limits R&D spend, limiting future growth. And/or NCR uses shelf offering to dilute shareholders to pay debt. Approximately 550 million USD due each year from 2024 to 2030. With 509 million USD cash EOY 2019 and 338 in 2020.

Mitigation: higher margins and continued focus on servicing recurring revenue will steady cashflows, allowing more to paid down on debt and less need to exercise the shelf offering. This combined with the pricing power, will allow them to push costs on consumers to increase cash flow.

2. Disruption from fintechs such as Square (NYSE:SQ) will reduce market share and lower margins.

Mitigation: NCR has a larger platform, which allows small and medium enterprises to upgrade their POS system when they expand, which will lower costs in the long run. (square benefits small customers) SME only represents 5% of NCR’s retail customers. NCR silver is also a similar product/service to square.

 

Catalysts:

1. Cyclical uptick from Covid will drive capex of customers and boost revenues. – this is not priced into management’s guidance for 2021 (Morgan Stanley investment call)

2. Cardtronics acquisition – adds to installed base, can cross sell with software and accelerates 80/60/20 strategy. – expected to add to eps until EOY 2022. I believe that the street is underestimating cross selling and ATM value.

Valuation: NCR trades at an EV to EBITDA multiple of 11x, compared to a comps average of 15.4x. Through a DCF analysis, my price target is $51.01. This represents an upside of 21.8%. This is based on assumptions of EBITDA margins (increasing from 15% to 20%), revenue growth (7% in 2021 and decreasing to 5% by 2025), and recurring revenue guidance by 2025. This is conservative based on NCR’s 80/60/20 plan to have 80% software revenue, 60% recurring revenue, and 20% Adjusted EBITDA margin by 2024. This will result in approximately 4 billion in FCF generated from 2021-25 and will be used to pay or re-finance debt.

Bibliography

BusinessWire. (2021, 03 15). Retrieved from NCR and Cardtronics Announce Definitive Acquisition Agreement at $39.00 Per Share: https://www.businesswire.com/news/home/20210125005452/en/NCR-and-Cardtronics-Announce-Definitive-Acquisition-Agreement-at-39.00-Per-Share

Grand View Research. (2021, 03 15). Retrieved from Self-checkout Systems Market Size, Share & Trends Analysis Report By Components (Systems, Services), By Type (Cash Based, Cashless), By Application, By Region, And Segment Forecasts, 2020 - 2027: https://www.grandviewresearch.com/industry-analysis/self-checkout-systems-market

NCR Investor Relations. (2021, 03 15). Retrieved from NCR: https://investor.ncr.com/events-and-presentations/events

 

By: Mitchell Switzer

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50.24

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Confidence

6-12 Months

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