PREVIEW-ATM makers lag banks on road to recovery

Tue Feb 2, 2010 2:36pm EST

* What: NCR, Diebold fourth-quarter results

* When: Starting Feb. 3 with Diebold

* Brazil contract to offset core market weakness for Diebold

* Investors seek update on NCR's pension challenge

By Deepti Govind and Saqib Iqbal Ahmed

BANGALORE, Feb 2 (Reuters) - If there's any industry that has mirrored the decline of the financials in the last two years, it's the automated teller machine (ATM) industry.

And even though banks have gradually started posting profits, it will take some time before ATM makers ring in the cash.

So when NCR Corp (NCR.N) and Diebold Inc (DBD.N), the two biggest ATM manufacturers, report quarterly results this week, investors will be looking for signs of a thaw in their end markets.

"Some of the regional banks are consolidating... and branch closings are going to make it difficult for Diebold to generate top-line growth in their core ATM and security business in 2010," Sidoti & Co analyst Michael Saloio said.

In 2008, about 95 percent of Diebold's sales were tied to the financial self-service and security industries.

Seasonally, the fourth quarter is strong for Diebold and should hold good even in a weak year, analyst Wedbush Morgan Securities analyst Gil Luria said.

The weakness in the financial segment will be partly offset by a large contract win in Brazil to supply electronic voting machines.

"The contract could contribute 9 cents to 10 cents to 2010 earnings," Saloio said.

Analysts expect Diebold to earn 41 cents a share on revenue of $742.3 million for the fourth quarter, according to Thomson Reuters I/B/E/S.

PENSION WOES FOR NCR

While Diebold's Brazilian contract win might offer some solace, for larger rival NCR an under-funded pension and no near-term signs of recovery in retail markets will only compound its woes.

NCR also makes self-service check-out kiosks for department stores and supermarkets.

"NCR shares will continue to reflect a significant discount to peers and trade mostly based on macro trends as long as NCR owns its pension program," Luria said in a note to clients.

NCR trades at a multiple of about 24 times its forward earnings, compared with a multiple of 42 for the broader IT services sector.

NCR has about $1 billion of under-funded pensions, seemingly the big overhang on its stock, which has mostly remained stagnant in the $11-$12 range in past three months.

"A full pay-down of the pension gap and spin-off of the pension program would eliminate negative effects," Luria wrote.

Limited visibility on end-market capital spending, particularly in the retail industry, which contributes about 40 percent of revenue, remains another area of concern for NCR.

"2009 was a very bad year for selling into retail, and we will have to wait and see to get any positive signs for 2010," Luria said.

Investors are also likely to keep an eye on NCR's DVD kiosks business, as this is the first quarter when the company could talk about results from the business.

NCR entered the entertainment kiosks market in 2006 and joined hands with Blockbuster Inc BBI.N in April 2009 to provide DVD rental kiosks. [ID:nN22260174]

Analysts expect a fourth-quarter profit of 26 cents a share on revenue of $1.28 billion for NCR. (Reporting by Deepti Govind and Saqib Iqbal Ahmed in Bangalore ; Editing by Jarshad Kakkrakandy)

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