NCR Corporation (NCR) Is a Tech Stock Worth Hedge Funds’ Attention

During the fourth quarter of 2013, Richard McGuire of Marcato Capital Management and Eric Bannasch of Cadian Capital increased their stakes in NCR Corporation (NYSE:NCR) significantly, and are the third and fourth largest owners, respectively. Other large owners of the computer hardware company include David Einhorn‘s Greenlight Capital, Ken Fisher‘s Fisher Asset Management, David Shaw‘s D E Shaw, and Mario Gabelli‘s GAMCO Investors.

Mick McGuire

NCR Corporation (NYSE:NCR) is a $5.7 billion market capitalization technology company that provides self-service and assisted-service solutions – such automated teller machines, kiosks, point-of-sale devices and interactive software – to customers in the financial services, retail, hospitality, healthcare, travel, gaming and entertainment industries. Relative to its revenue base of $6 billion, the company views its available market as $82 billion, including ATMs, enterprise software and payments / processing. Its financial goals by 2016 include revenue of $7.3 – 7.7 billion, gross margin expansion of 300 basis points versus 28.5% in 2013, operating income of $1.0 – 1.1 billion (versus $717 million in 2013), free cash flows of $715 million (versus $381 million in 2013) and an EPS CAGR (compounded annual growth rate) of 14-18%. NCR has also been on a drive to increase its mix of higher-margin software revenue, with a target of $1.2-1.3 billion, or 16 – 17% of total revenue (versus 12% in 2013), in three years.

On the balance sheet side, NCR Corporation (NYSE:NCR)  has higher levels of leverage relative to its peer group of computer hardware companies, with a debt-to-capital of 65% (versus 1% for peers), an interest coverage ratio of 8.6X (versus 59.4X for peers) and net debt / EBITDA of 3.2X (versus 0.8X for peers). However, its increasing profitability and strong free cash flow generation should enable the company to pay down its debt and improve these metrics over time. The company also has a pension plan that is underfunded by $461 million as of 2012 but this gap is expected to narrow to $250 million by 2013 and $100 million by 2014, which should be less of a drag on cash flows going forward.

Continuing its growth strategy of moving into fast-growth, high-margin, software-centric businesses, in early December 2013, NCR agreed to purchase banking software provider Digital Insight Corp. for $1.7 billion and payment processing/ fraud detection software provider Alaric Systems for $84 million. The two deals will increase the company’s annual software revenue to $1.1 billion and be slightly accretive to its 2014 EPS and $0.15 accretive to its 2015 EPS.

Following a recent price drop due to disappointing near-term forward guidance provided during its fourth quarter earnings release, the shares are attractively valued, trading a forward P/E and EV/EBITDA multiples of 11.2X (versus 13.6X for peers) and 7.8X (9.4X for peers), respectively. However, if management’s long-term guidance is still valid, an in-line P/E on 2015 EPS of $3.73 (the mid-point of guidance) implies a stock price of $51by the end of 2014, or approximately 50% upside from current levels. Given NCR’s ongoing mix shift, cost savings and accretion from recent deals, there is little reason to believe its financial targets are not attainable.

Disclosure: none

Recommended Reading:

Mick MsGuire and Marcato Capital’s Top Stock Picks

Relational Investors Sells More Shares of SPX Corporation (SPW); Wexford Capital Further Cuts Stake in Diamondback Energy Inc (FANG)

Hedge Funds’ Interest in Hubbell Inc. (HUBA): Activism, Fundamentals or Both?

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!