A Turnaround Play of This Global ATM Supplier

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shareholders of Diebold Incorporated (NYSE: DBD) must be quite disappointed because the company’s share price has not moved much since the beginning of the year. Diebold has gained nearly 3.6%, lagging the S&P 500’s return of nearly 11.7%. However, Mario Gabelli seems to be bullish on this stock, owning more than 3.5 million shares of the company as of March 2013. Let’s take a closer look to determine the attractiveness of this stock.

One of the global ATM leaders

Diebold has a long operating history dating back to1859, providing self-service solutions and security solutions to the financial, commercial and government and retail markets. Diebold derived most of its revenue from the financial self-service, accounting for 77% of its total revenue in 2012, while the security segment represented 21% of the 2012 total sales.

In terms of geography, Diebold’s main market is still the U.S., accounting for 53% of total revenue. Latin American market, including Brazil, ranked second with 22% revenue share. One popular financial self-service solution is the automated teller machine (ATM). The company reported that it is one of the global leading suppliers of ATM around the world. According to Barron’s, Susquehanna Research Group pointed out that Diebold had 50% of the North American ATM market and 25% of the global market, only behind NCR Corp (NYSE: NCR).

Potential upside on the business restructures

In the first quarter 2013 Diebold experienced a loss of nearly $13.5 million, much worse than the profit of nearly $45.2 million in the first quarter last year. The loss in the recent quarter was due to the lower sales and higher expenses, including $10.1 million in non-routine and amortization expenses. However, that pessimistic operating picture is likely to improve under the leadership of new CEO Andy W. Mattes. Diebold has laid out a multi-year realignment plan to reduce cost and drive the business forward.

The company plans to cut costs by $100-$150 million by 2015. Several cost-cutting actions will be implemented, including cutting 700 full time jobs and selling several plants to suppliers to rationalize manufacturing facilities. Diebold expected that around half of the savings would flow to the operating profit. The new CEO would like to push the cost reduction sooner and expand the business in electronics security segment. Being excited about the company’s future, he commented “There's a lot of upside in the company. It's a very strong brand.”

The cheapest among its peers

Diebold is trading at $31.70 per share, with a total market cap of about $2 billion. The market values the company at around 11.4 times its trailing EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization). Compared to its peers, including NCR and ACI Worldwide (NASDAQ: ACIW), Diebold is much cheaper.

At $32.70 per share, NCR is worth around $5.4 billion on the market. The market values NCR at much higher valuation, at 14 times its trailing EBITDA. At the end of 2012, NCR has expanded its business footprint in software and the retail industry by acquiring Retalix for $650 million in cash. The acquisition would make NCR the leader in omni-channel retail solutions, improving the company’s revenue mix towards higher margin software and services segment. From the acquisition, NCR hopes to achieve around $5-$10 million in pre-tax cost synergies for the full year 2013 and around $20-$25 million in annual cost synergies in the next three years.

ACI Worldwide is the most expensive company among the three. It is trading at $45 per share, with the total market cap of nearly $1.8 billion. The market values ACI at more than 16 times its trailing EBITDA. The company is the developer and installer of software products and services to facilitate electronic payments, operating in around 36 countries. ACI has performed quite well, with more than 96% retention rates and more than 70% annual recurring revenues. Most of its revenue, 43% of the total revenue, was generated from retail payments, while bill pay/collections ranked second, accounting for 17% of the total revenue. For the full year 2013, ACI expected to generate around $895-$915 million in revenue, with the operating income staying in the range of $170 million to $180 million. The full year 2013 EBITDA was estimated to be around $266 to $276 million.

My Foolish take

Diebold seems to be a good stock for investors to ride the company’s turnaround. With the lowest valuation, new leadership and the potential $100-$150 million cost savings, Diebold could boost its bottom line significantly by 2015, pushing up its share price. Senior portfolio manager Ann Milletti of Wells Capital Management thought that the company’s private market value could be around $44 per share, a 38% premium to its current price.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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