NCR Corporation: Does not quite register Premium

Sniggers were heard on Monday when NCR Corporation announced it had bought Digital Insight for $1.6bn. Digital Insight, whose software lets banks offer their services online, had been bought for only a $1bn four months ago by a private equity firm. Now it would be flipped at a fantastic profit. But NCR, the inventor of the mechanical cash register in 1879, has been a canny acquirer of late as it refashions itself as a software and services provider (see: IBM, Dell). Since its shopping spree began with the $1.2bn buyout of Radiant Systems in July 2011, its shares have shot up 70 per cent. But the gig may be up, as its leverage balloons and worries about cash flow and organic growth fester.

NCR’s core hardware business is automated teller machines and the point-of-sale devices that facilitate payments. But the acquisitions of Radiant, Retalix ($750m) and now Digital Insight are supposed to form the fabled “solutions provider” that sells software and upkeep along with its devices. Device sales are, after all, less profitable and less consistent. Hardware now totals less than half of group sales and operating margin has jumped a few points, to 11 per cent.

Even if cheap debt financing boosts earnings, the flurry of dealmaking will send NCRs ratio of total debt to operating cash flow to 4 times. And free cash flow is a constant worry for the company. As a result of pension costs and restructurings, 2013 operating income of $700m will only translate into $225m of cash, NCR reckons.

With little room for more transactions, all eyes turn to organic growth. In its last quarter, revenue in NCR’s largest segment, financial services, fell 3 per cent. Further, Wedbush believes 2013 group organic growth will be just 3 per cent, half what NCR forecasted a year ago. Getting fleeced by private equity may be the least of NCR’s concerns.

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