Two Stocks – Direct Competitors – A World Apart

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NCR (NCR) and Diebold (DBD) pretty much split the domestic cash machine business, and a rash of ATM upgrades now is good for both companies. But long-term investors should take note of several key differences in these companies. Diebold is offering the illusion of value. NCR brings imagination that could make its shareholders happier in the years to come.

DBD Chart

NYSE:DBD data by YCharts

On the surface, that NCR vs Diebold price chart makes Diebold quite tempting to value investors. After all, one could conclude that the easy money's been made already in NCR and perhaps Diebold's turn is next. Diebold’s price decline – about 1% this year vs NCR’s 44% gain – puts its dividend yield at 3.8%. The company has raised its dividend annually for decades, which makes it a particularly compelling stock in a rising interest rate environment. NCR doesn’t pay a dividend at all.

DBD Dividend Chart

DBD Dividend data by YCharts

Diebold looks like value for other reasons too. Its dividend-helped share price valuation, using forward PE ratio, is only modestly higher than NCR’s. It controls slightly more than half of the U.S. ATM market. The company recently began a major cost cutting plan that includes hundreds of job cuts and closing certain manufacturing facilities. A new CEO started in June. It’s rolling out ATMs with “concierge” services – video links to customer service reps – for Bank of America (BAC) and others. Lower costs, a big dividend and some new technology paired with decently-valued shares; what’s a value investor not to like?

The potential for a value trap. Diebold is very dependent on the ATM market -- sales and service comprised more than three-fourths of sales last quarter – and that’s a problematic market long-term. The number of U.S. bank branches is shrinking rapidly, and the market for ATMs here is considered saturated. That’s why Diebold’s revenues and earnings have been shrinking too.

DBD Revenue TTM Chart

DBD Revenue TTM data by YCharts

Although there’s still significant growth overseas to be had, Diebold runs a distant second to NCR internationally. A report published in Barron’s estimated Diebold’s worldwide ATM market share at 25%. Slightly less than half of Diebold’s revenues come from international sales, which include sales and service of security systems.

While Diebold sees its profit margins shrink in order to stay competitive in this business, NCR widens its margins with products beyond the banks. NCR makes the machines used in cashless payments, like self-checkout terminals at Home Depot (HD) and Wal-Mart Stores (WMT), as well as the airport ticket kiosks for Southwest Airlines (LUV) and car rental companies, for example. It runs cloud-based tools that small businesses manage with smartphones. The financial services sector and its ATMs attributed about 51% of NCR’s overall revenues last quarter.

DBD Gross Profit Margin TTM Chart

DBD Gross Profit Margin TTM data by YCharts

The difference that diversity makes was illustrated, once again, in both company’s earnings and forecast updates in recent weeks. Diebold’s quarterly revenue was down 4.9% compared to the same quarter last year, and it lost money for the third straight quarter. It issued new full-year earnings guidance that was significantly lower than analyst estimates of about $1.86 per share. Its shares get almost exclusively hold ratings from analysts.

In comparison, growth of 26% in NCR’s retail segment and 22% in its hospitality segment helped bring up overall revenues 9% for the quarter. NCR reaffirmed its full-year guidance; 9% to 11% revenue growth, and roughly flat earnings. NCR has considerable pension obligations, and any consideration of investing in the company warrants reading the fine print about this in its regulatory findings. Industry analysts are mostly bullish on its shares.

Diebold does not have the products to serve a cashless society, and its ATM business may not be able to give value investors the security they want. Perhaps NCR, with the growth it’s showing, is the better place to begin your investment research.

NCR's more diversified product line -- and its move to service the cash-less retail transaction -- is particularly important. American students and twenty-somethings don’t often hunt down ATMs for spending money. They use their smartphones at Starbucks (SBUX) and their debit cards at Wal-Mart. No one uses cash to buy something at Amazon.com (AMZN) and other online retailers. In fact, actual cash was used in only about 29% of retail payments last year, compared to 36% a decade ago, according to the report in Barron’s.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.

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