Friday, December 11, 2009

NCR Corp. (NYSE:NCR): Sizing It Up: Going to Overweight - J.P. Morgan

J.P. Morgan is upgrading NCR Corp. (NYSE:NCR) to Overweight from Neutral with a $15 price target (prev. $16).

Assuming near zero growth in core ATM and retail businesses in 2010, the firm believes NCR can still eke out 5% revenue growth owing largely to ramping Blockbuster Express operations. They also believe the pension funding gap is likely to narrow slowly from here. There's still a ton of execution risk in this story, and company guidance has been poor recently, but the firm thinks risks are priced into the stock. ´

Core business remains weak. End market conditions have not changed since the 3Q conference call; retail is still very weak, but stable; financial services is stable and improving slowly. As ATM manufacturing ramps in Brazil and Georgia, NCR believes its competitive positioning is improving, though it could take 6-9 months for operations to mature, meaning associated margins will not improve until 2H10. JPM still believes there’s risk that the rate of deployment of deposit-automation will slow in the U.S. in mid 2010 as national banks conclude their aggressive rollouts.

They are forecasting near zero sales growth for NCR’s core retail and ATM businesses through 2013, leaving room for positive developments, including reaccelerating ATM deployments in Eastern Europe, share gains in Brazil, adoption of cash recycling solutions in China, broader adoption of deposit automation in the U.S., and a retail recovery.

5% growth in 2010 largely from the DVD initiative. JPM believes the DVD Kiosk initiative 2011 can generate $250mm of revenue. The acquisition of DVDPlayer accelerates NCR’s plan to deploy 10,000 Blockbuster Express kiosks by mid 2010. Based on our first-cut forecasts for this entertainment segment, they believe the business can be cash flow positive in 1Q11

NCR has deployed 1,600 Blockbuster branded DVD kiosks so far and is on track to deploy 2,500 by year-end, with another 1,300 coming from the DVDPlayer acquisition (Safeway deployments on the West Coast). The company’s plans call for 10,000 units to be deployed by mid 2010. Recent commentary suggests that the typical kiosk, costing $12.500, is generating $40,000 of annualized revenue within 6- 9 months of initial deployment and is cash flow positive by that time. Assuming that 10,000 kiosks are deployed by mid 2010, the firm estimates that the business could contribute ~$300mm in revenue in 2010 and achieve cash flowbreakeven in 2H10, which is ahead of current expectations.

JPM is upgrading NCR to Overweight from Neutral. They believe NCR is attractively valued, even taking into consideration significant execution and end market risks, and will therefore outperform the mean of their coverage. The stock is trading at a near 50% discount to its peers on the basis of the 2010E EV/EBITDA multiple. JPM's December 2010 price target goes to $15.00, based on an assigned multiple of 15 times CY11E PF EPS (ex Pension funding), to which they add back $5.60 gross of pension obligation funding short-fall. NCR has $2.50 net cash per share, and they believe the Kiosk business might be valued at $1.00-1.50 per share, so the core business is currently valued at ~$950 million, or about 0.2 times 2010E sales.

Notablecalls: This is not a monster call from JPM. While they are upgrading NCR to an Overweight, they are actually lowering their estimates and price target. Yet, with the stock down 4pts (-30%) from its current highs JPM's blessing will likely be welcomed with relatively strong buy interest.

The DVD Kiosk business at least sounds sexy and will add the much needed growth driver. Also, while not mentioned in the note, NCR has previously been highlighted as a potential takeout candidate. United Tech (UTX) CEO said on investor conf. yesterday they have earmarked $2-3bln for takeovers in 2010. NCR surely fits the bill.

I think NCR will trade in the 10.25-10.50+ range today and possibly higher in the coming weeks.

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