A Sleeping Giant with Monster Potential

This sleeping giant and applied tech stock is about to awaken into a global growth monster. The company’s products are interwoven into the fabric of everyday life so seamlessly that you probably don’t even notice them or know the company’s name. Yet you use its products at virtually every bank’s drive-thru or ATM. And this company just bought one of its biggest rivals, doubling its size and gaining a 40% share of the projected $74 billion dollar self-service kiosk market by 2020.

The Diebold Dynamic

Diebold (NYSE: DBD) is a leader in banking automation with the ATM as its core. Yet it has misfired over the past few quarters (see table), as its clients have backed out of some orders and the ATM market has grown stodgy and stale. Besides, who could blame banks for dragging their feet to expand these days, given all the regulations and the flat economy?

But during this slow period, Diebold has quietly evolved its products beyond self-directed banking into information management and other areas of the Internet, and is slowly continuing to automate banking.diebold opton box

I became interested in Diebold when I drove up to a different bank office than the one I usually use to make a deposit. Instead of the circa 1969 vacuum tube for swapping checks and receipts, and the asbestos-coated speaker that makes the teller sound like the teacher in the Peanuts cartoons, I was treated to the latest Diebold banking interface. It had high-resolution screens and a thoroughly modern intercom system that let me not only understand the teller but also see who she was and what she was doing as we spoke.

Upon further investigation, I discovered that Diebold does much more for banks than what you see. For example, it offers cash management software, online security and network management, as well as off-line security through security doors and metal detectors that can trap robbers inside a glass cage as they exit. Now, with the 2016 purchase of Germany’s Wincor Nixdorf, Europe’s largest self-service kiosk company, Diebold will double its sales and increase its global reach in banking and beyond.

The Wincor Win

The Nixdorf deal, which will cost $1.8 billion and is expected to close in the next six months, makes Diebold a global powerhouse. The combined company will be the number one ATM machine maker in the world, ahead of former number one NCR (27%). The merger will also increase Diebold’s European ATM market share to 70% from 15% and add retail kiosks to its product line.

Those retail kiosks will be key to Diebold’s growth. Global banking can still grow, but most of that growth is in high-risk emerging markets that take time to develop. But retailing is a different story. Here, convenience stores, small businesses, department and specialty stores, and gas stations are ripe for automation. That means adding self-checkout terminals, digital fuel pumps and automated car wash operations, for example. Wincor has a sizeable footprint in those products.

One of them is Wincor’s Beetle kiosk line. It’s placed in, say, a department store, and its touch screen lets customers see a bridal gift registry for the upcoming weddings they’re attending as well as pricing and even the location of those products in stores. Other kiosks allow self-service checkouts in grocery stores or buying and printing tickets at movie theaters.

The Automated Future

Making kiosks interactive and for more than one purpose is the future in this industry. ATMs will no longer just dispense cash.  Instead they can supply pre-paid cards, coordinate with mobile devices and advertise banking services customized to the ATM user’s needs.

If Diebold CEO Andy Mattes is correct, two big things will happen: ATMs will be replaced much more rapidly, in 24 to 36 months versus the traditional seven to 10 years, and revenue could potentially double. Why replace a perfectly good ATM? Because the new ATMs will also be vending machines for items such as lottery tickets, transit passes, or concert, movie and sporting event tickets.

A Bargain

Diebold is dirt cheap, selling at just over 9 times trailing earnings while paying a nifty 4% dividend. It’s been suffering some growing pains, but gross income and revenue in the most recent quarter are rebounding. Plus, it’s cash rich. Cash flow is improving and its balance sheet has $2.15 billion in cash, $4 billion in assets and just $3.4 billion in total liabilities, so it can afford more acquisitions.

What Could Go Wrong?

Diebold seems to have seen its worst days, and its acquisition of Wincor is full of potential. But I have two major questions: Will the merger go smoothly and will the combined business deliver on its growth potential? While I judge both risks to be moderate, they are dwarfed by the upside potential. Buy Diebold up to $29.diebold bar chart

Stock Talk

Guest User

Guest User

Looks like this litigation thing is taking DBD to the cleaners! Got any current insight? Barring the merger possibly being regulated, should we be doubling down now at current numbers just based on current business? The -DBD021717C30 is today traded at .65 vs your current up to $2 buy recommendation. Time flies. Thanks for the insights!

Joe Duarte

Joe Duarte

There are many crosscurrents in the price of DBD right now. Along with the merger that has already gone through, there are macro issues to sort out such as the European economy and now the DOJ’s $14 billion proposed fine of Deutschebank which is a major European bank. Anything that throws a wrench into banks could have negative effects on DBD. I own the stock and the option myself so I am personally aware of the recent decline. That said, I will have more in depth analysis for Monday. Europe is clearly an area of concern at the moment. Joe Duarte

Robert Katilus

Robert Katilus

Dr. Duarte, I’ve owned ARGS stock for over 1 1/2 years. It,s been an up & down ride. I still believe in args.Their earnings are gaining momentum and losses are going down. Yet the share price declines most days. No disappointing news with clinical trials.When does anyone expect a BREAKOUT? Are you still a believer? I’m hoping November quarterly report is it. Thank you, Robert Katilus .

Joe Duarte

Joe Duarte

Hi Robert:

ARGS is one of our special situation stocks. That usually means that it’s a speculative company. That being said, I own ARGS as well. To be honest I don’t see anything unusual about the way it’s behaving given the fact that it’s still in the research and development stage for its potential products. It may take a lot longer for the stock to rise above the current trading range. The easy way to resolve the issue would be for the company to get bought by someone for a nice premium. I have no way to know if that’s plausible at this point. I’m staying patient but I realize that it is frustrating.

M

Med

Hi Joe, Any outcome/thoughts from Argos last meeting where it
participates in BioCentury’s 23 Annual NewsMakers in the Biotech Industry Conference ..? Thx..!

Jim Pearce

Jim Pearce

I spoke briefly with Dr. Duarte, he is busy running is medical practice today so he doesn’t have time to respond to your question right away. Although Argos has not released a transcript of its presentation at the conference, the day after the conference it did put this slide deck on its website which presumably was used at the conference: http://files.shareholder.com/downloads/AMDA-TSH5S/2549544159x0x908308/C07399B4-7304-4157-AC4A-24DAFF047F96/ARGS_IR_Slide_Deck_September_2016.pdf. From what we can tell there is really nothing new in this deck, other than some of the timeline info on slide #20 so there may not be much in the way of new information until their next quarterly report due to be released in mid-November.

Strat

Michael Smith

noticed Break through Tech stocks has a rec of sell for EKSO . an explanation ?

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