diebold, inc. (nyse: dbd) · • diebold entered the market by acquiring gas tecnologia • during...
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M c I n t i r e I n v e s t m e n t I n s t i t u t e1
MCINTIRE INVESTMENT INSTITUTEAT THE UNIVERSITY OF VIRGINIA
Zach Odle and Matt Retterer|11/7/12
Diebold, Inc. (NYSE: DBD)
M c I n t i r e I n v e s t m e n t I n s t i t u t e
AGENDA
Company Overview
Thesis Points
Evidence
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Risks4
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DIEBOLD’S OPERATIONS
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• “Diebold is a services company providing integrated
technology solutions that enable our customers to
maximize their self-service and security capabilities.”
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CORE BUSINESS PRODUCTS
• Financial Self-service • Security
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PRODUCT BREAKDOWN
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CUSTOMERS BY INDUSTRY
Financial Government Retail
description
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THESIS POINTS
1. Shift from Manufactured Products to Software-led Services
2. Higher Margins than Competitors
3. Growth in Emerging Markets
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THESIS POINT 1
Shift in Business Strategy
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SHIFT TOWARD SERVICES
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2012 Q1 RESULTS
• Total Revenue:
–Services: 57% of sales, 28% gross margin
–Products: 43% of sales, 27% gross margin
• Revenue in North America:
–Services: 62% of sales
–Products: 38% of sales
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
TREND OVER TIME
• Services – 1.9% increase in revenue between 12Q3 and 11Q3
• Products – 0.6% increase in revenue between 12Q3 and 11Q3
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
IMPLICATIONS
• Integrate software services to move higher up on the value-added chain
• Less dependence on hardware revenue
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EXAMPLES OF INNOVATION
• Partnered with Verizon to apply 4G to ATMs
• Aims to introduce the world’s first prototype of a virtualized ATM
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
THESIS POINT 2
Higher Margins
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
INCREASINGMARGINS
• Misperception: Undervalued Stock
–Hidden value in margins
• Margins to look at:
–Gross Profit Margin
–EBITDA
–Yield
–Debt/Equity Ratio
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MISPERCEPTION
• Appears competitors’ stocks are doing better
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
MISPERCEPTION CONT.
• DBD stock is undervalued due to recent Q3 decreased revenue and earnings outlooks
• DBD exhibits higher margins in many categories that make it a worthy buy
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
GROSS PROFITMARGIN
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EBITDA
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DIVIDEND YIELD
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DEBT/EQUITY
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VAR: DEBT/EQUITY
• S&P Analyst Todd Rosenbluth
–Ratio suddenly increased by 6% in 2011 compared to prior 5 years, during which it had stayed constant
• DBD bought back 111.82 million shares in 2011 alone
• Increased debt financing means higher profitability for owners
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
COMPETITIVE ADVANTAGE
• Diebold is the best buy in its industry:
–Highest Gross Profit Margin
–Competitive EBITDA
–Consistent Dividend Yields (59th consecutive dividend increase over 15 years)
–Recently bought back lots of stock which increases value of remaining ones
–LOW BUY
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
THESIS POINT 3
Emerging Markets
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
GROW IN EMERGINGMARKETS
• Saturation in North America
• Primary growth in Latin America/Brazil and Asia regions
– 59% untapped in EA
– 65% untapped in SA
2012 Q1 Revenue Mix
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GLOBAL COMPETITORS
• NCR
• Wincor Nixdorf
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STRATEGY
• Acquire local security firms as gateway to markets
–Avoid legal work & bureaucracy
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
BRAZIL
• Diebold entered the market by acquiring GAS Tecnologia
• During 4Q11, Diebold incurred a $0.43/share benefit from release of a tax value allowance
• 30% revenue growth in Latin America/Brazil
• Secured a contract in February to provide 3,800 ATMs
• Contract with Brazilian Government to provide voting terminals for $711 million
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MISPERCEPTION
• Decreased revenue outlook in Q3
• Share price dropped from 33.75 to 31
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
MISPERCEPTION CONT.
• Decreased earnings outlook due in large part to delayed revenue recognition in Brazil
–Will be recognized in 2013
• Intention to purchase 90,000 voting terminals confirmed
• Only 35,000 units will be recognized in 2012
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ASIA
• Fastest growing market with an expanding Middle-Class
–China
– India
–Thailand
– Indonesia
• Revenue increased 15%
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
VAR
• Paul Thurston – group general manager of personal financial services of Asia/Pacific of HSBC
• “In the past two years, banks in Asia, excluding China, have been opening more branches and ATMs than they have closed.”
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EXAMPLE
• Head start in Asia due to 2008 Beijing Olympics
• $26 million in revenue from the Olympics
• Gained a foothold over competitors
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
RISKS
• Radical currency fluctuations in foreign countries (Brazil)
• Law suite from Brazilian tax authorities regarding $133 million in indirect taxes
• Strong competition in EMEA
• Unpredictable results of on-going investigation under the Foreign Corrupt Practices Act (FCPA)
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
IN SUMMARY
• Diebold is undervalued
–Share price dropped from 33.75 to 30.70 in under a month due mainly to Q3
–Analysts predict higher margins than Diebold does
–Change in business strategy (products to services)
–Penetration into emerging markets
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
FINAL RECOMMENDATION
• We recommend MII long DBD at 3% of its portfolio
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