Stephanie Link: Is Diebold a Bankable Buy?
By: Stephanie Link
| 03/03/14 - 09:00 AM EST
NEW YORK (TheStreet
) -- If you'd read some of my posts on my blog
, you'll notice a pattern. I like turnaround stories, management changes, and restructurings. Companies that have been mismanaged but have a brand name and potential for market share gains, revenue upside and potential for margins to recover which in turn could lead to positive operating leverage. Based on this theme, my next idea is Diebold (DBD)
You may know DBD as the largest U.S. manufacturer of ATMs, which it is, but it also has a strong presence in electronic security - which is a big area for future growth.
I think earnings have bottomed and the company has earnings power potential of $2.50 or more in 2016 vs. the $1.32 just put up in 2013. It has a new management team, has an aggressive cost cutting program underway, and conservative guidance. The balance sheet is strong with just 12% net debt/cap, the 3% dividend is well secured and I think over time we'll see cash distribution growth. The company has a fairly new management team - the CEO Andy Mattes joined in June 2013 from HP (HPQ)
and the COO George Mayes Jr. was promoted from Executive VP in Global Operations in January 2013. The CFO stepped down late last year and the company is currently looking for a replacement - for now Christopher Chapman is in the interim role, he is VP of Global Finance.
The new management team is beginning to bring back the credibility lost under prior management who let costs get out of control and underinvested especially in technology and infrastructure. The new team has been in their current roles for long enough to have a game plan of improvement and, while the shares have rallied 11% since its November 2013 analyst day, I think earnings are bottoming and the trough is in.
Mattes brings an aggressive leadership style with a focus on pay for performance and accountability. He has much work to do in terms of better engaging his employees -- but it was loud and clear at its recent analyst day that this is expected and the company is showing a turn. At this meeting Mattes laid out a multi-year plan to turn around the company - a 5% expense reduction program companywide, operational improvements, better efficiencies and efforts to drive better cash flow growth by increasing its recurring revenue streams. Longer term there are goals of new product introductions and new end market customer segments that should drive higher market share over time.
The cost cuts will be things like headcount reductions, freezing its U.S. pension, removing redundancies, and streamlining its infrastructure. Guide is that these efforts will lead to $150 million in annualized cost savings by 2015 - half of which will be plowed back into the company to drive growth. In fact, they've already hired Oracle (ORCL)
, Salesforce.com (CRM)
and Infosys (INFY)
to overhaul the IT infrastructure with a new ERP system which will help the company better analyze and track real time demand trends, backlog, product pipeline, monitor service truck route optimization and overall efficiencies to its entire platform. The technology transformation will be completed by the end of this year - the benefits seen next year. But beyond its technology, the company will invest in salesforce automation, service delivery and R&D.
Mattes hired Stefan Merz, whom he worked with at HP and Siemens
, to run this cost cutting effort and the sales force transformation strategy. He obviously has confidence in his colleague to get this done. Free cash flow attention is another item on the list to fix - since peaking at $253 million in 2009, it has steadily been declining - at the end of 2013 it was at $$75 million. Mattes has been working with Diebold's customers and suppliers to better align payment schedules and has started to renegotiate more favorable terms with the company's suppliers. This will not be a quick fix, but the process has begun.
While there is a lot of low hanging fruit at the company from a cost and productivity standpoint, in the end you need growth. I like the secular growth story in the ATM segment, which will be driven by productivity and efficiency interests from Diebold's largest customer base - the banks. Also, the innovation and transformation of in store teller support also will drive end market demand. The company currently manages 20,000 ATMS - the largest and the most diversified. There are over 250,000 bank owned ATMs in the U.S. and DBD being the leader, it has a strong end market. But it's not just the install - it's the service side of the business that carries the margins and the upside - since the cost of maintaining an ATM is about 5x the purchase price over a five year period. Banks (especially the smaller ones) have many other things to focus on rather than cash management, software updates and transaction processing.
DBD will do this and will benefit from the outsourcing theme over the coming years. Also, there are other end markets in retail, consumer, industrial and in security applications. And with only really one major player from a competitive standpoint - NCR (NCR)
, the two stand to benefit from automation and outsourcing trends in many industries. There are also opportunities abroad - in 2014, in Brazil alone the company has the buildout for 6,500 ATMs at Caixa Economica
and 3500 at Banco do Brasil
. In electronic security the opportunities are equally, if not more, exciting. In the first half of 2013 electronic security orders increased 40% to 50% year over year. And since they are multi-year contracts, the recurring revenue is very attractive. It's one of only 3 players in this side of the business that does system integration and alarm monitoring, with an addressable market of $9 billion and growing 3% to 4% per year. Its new products also position it well for future growth.
I like the DBD story and even though shares have rallied, there's more to come. New management has an exciting restructuring story underway, strong end market secular growth and a solid balance sheet and dividend yield. I think it's a bankable buy.
--Written by Stephanie Link in New York.