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.
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.