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Diebold (DBD) Offers Growth of Nearly +20% at a Sharp
Discount |
Published:
August 30,
2007
Diebold (NYSE: DBD, $43.78)
was founded in 1859 as a manufacturer of safes and bank vaults.
Today, the company is still actively involved in the banking
industry, but in a much different capacity -- automated teller
machines (ATMs).
Specifically, Diebold is one of the world's leading suppliers of
ATMs, controlling one-third of the global market -- and
capturing a dominant two-thirds share of the U.S market. While
this business is somewhat mature, the next generation of ATM
technology has led to a wave of replacements as financial
institutions install state-of-the-art systems with advanced
functionality.
For example, many newer machines accept cash deposits without
envelopes, and check imaging allows for expedient electronic
transmission and processing of deposits. Furthermore, in
compliance with recently enacted legislation, the latest ATMs
offer enhanced security features and voice guidance technology
for the visually impaired.
ATMs (along with check cashing machines and other financial
"self-service" products) represent roughly two-thirds of
Diebold's revenues. However, only about half of that comes from
actual product sales -- the remainder is generated by service
and maintenance calls. More often than not, when Diebold sells
an ATM, it also signs a long-term service contract. Because this
work requires little in the way of capital expenditures, this
segment of the business tends to be highly cash-generative.
Aside from ATMs, Diebold is also a top provider of integrated
security and surveillance systems. Customers in this division
include banks and credit unions, as well as leading retailers
like Kroger (NYSE: KR), Starbucks (Nasdaq: SBUX), and Rite Aid
(NYSE: RAD).
Finally, the firm also has over 150,000 electronic touch-screen
voting machines in operation around the country. While these
machines have their critics, we think the technology will eventually
win out and replace outdated paper ballots -- and Diebold has a
valuable first-mover advantage in this niche.
Combined, these operations took in nearly $3 billion in revenues
and spit out around $200 million in free cash flow last year.
And over the years, management has done a remarkable job of
returning excess cash to shareholders -- the firm's recently
boosted its dividend
payment for the 54th consecutive year.
Better still, management also recently authorized the repurchase
of 2 million shares.
Looking forward, Diebold is expected to deliver healthy earnings
growth of +18% annually over the next five years, thanks in part
to an expanded presence in emerging markets like Mexico, Brazil,
Russia, and China.
We should point out that the company is currently working with
the SEC to straighten out some revenue recognition issues. These
talks only involve the timing of certain revenues, and have
little bearing on the firm's cash flow potential. However, any
adverse rulings could introduce some volatility into the shares.
Fortunately, with the stock now trading at a wide
27% discount to
its $60 fair value, there is a significant margin of safety
built into the current price. All in all, we like Diebold's
recurring cash flows and long-term growth prospects --
particularly in fast-growing international markets where banking
systems are just beginning to play catch-up.Good investing!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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