FYI, Info on NCR. this was taken from the prelimary evaluation of NCR by morgan stanley.
o OPERATING LEVERAGE IS SIGNIFICANT. NCR appears to have succeeded in the fastest turnaround in industry history, but there is further to go. The way to achieve management's goal of an upper-single operating margin is by gross margin expansion since expense ratios are competitive. The current gross margin of 27% through nine months should rise into the low- and possibly mid-30s through a combination of product mix shift and process improvements. We believe NCR has earnings power of $4.00-5.00 by the turn of the century.
o THE BALANCE SHEET IS CLEAN. AT&T spun off NCR with a great balance sheet that should give customers confidence. At year end, cash could be $900 million, debt just $90 million, and equity $1.2 billion. Inventory turns and receivable days are decent and are likely to
improve. The company should be a modest cash generator.
Risks
o DATA WAREHOUSE COMPETITION IS INCREASING. Both server hardware and database software rivals are rushing into data warehousing given the high growth rate and attractive margins. The two concerns we have are (1) users opt for databases perceived as open, such as Oracle ($48) and Informix ($25), and (2) Teradata loses share in the medium and
lower end at 100-700 gigabytes, where symmetric multiprocessors and NUMA systems are alternatives. NCR is deflecting these threats by making the Teradata system more open and scaling it downward.
o SALES FORCE PRODUCTIVITY IS POOR. NCR's revenue per employee of $175,000 is below that of competitors. Part of the explanation is the significant portion of revenue from services at 37%. In addition, we think sales productivity is low at about $2 million per sales person. With modest indirect distribution, the company relies on its direct channel. Previously high turnover and poor processes may be to blame and will take time to fix.
o NCR MUST ATTRACT NEW CUSTOMERS TO SUSTAIN GROWTH. NCR's slash-and
burn period is over with costs under control. That means the emphasis is on profitable growth. The first priority is to gain share of spending in the installed base. Eventually, NCR must increase its mind and market share outside its base. Our surveys find low recognition outside the base, with the company's data warehouse capabilities underappreciated. Management must make good on its goal of making NCR a "thought leader."
VALUATION
Our analysis suggests NCR is reasonably valued given our current estimates. Relative to its computer comparables, NCR is somewhat cheap on enterprise value-to-revenue, fairly valued on enterprise value-to-EBITDA and on a multiple of earnings, and expensive on price-to-book. A reasonable price range is $30-40 per share, we think. Valuing NCR's stock is not simple given a mix of businesses and low near-term earnings. We believe the closest comparables are computer
vendors undergoing turnaround situations, such as Digital ($40), Data General ($16), Unisys ($7), Amdahl ($12), and Tandem ($14) as well as IBM ($156). We expect the stock to be covered primarily by computer analysts. We show the valuations of Imation ($33) as an example of a
spinoff and of Diebold ($55) as the primary ATM competitor.
Enterprise value-to-revenue is a useful measure given subpar profitability in 1996-97. At $36 per share, NCR is trading at a ratio of 0.49 on estimated 1996 revenue and the likely year-end balance
sheet, similar to Data General (0.44) and above DEC (0.35). Unisys (0.66), Tandem (0.92) and Amdahl (0.82) are higher and indicate where NCR's valuation could go as profit margins improve and investor confidence increases. The first-tier vendors such as IBM sell at one times or higher.
Price/earnings is more meaningful on estimated 1998 results. By 1998 NCR should be closer to normalized earnings; in our calculation we use a 35% tax rate for comparability, though NCR's actual rate should be about 50%. Comparables are varied, but a multiple of 11-13 times 1998E net income appears reasonable. At $36 per share, NCR is at the high end of the range.
best returns j |
