Diebold's Bold Quarter

My father, never one to embrace change, insists on keeping as many $100 bills as will fit in his wallet at any one time. His father still does the same. Me? As a person who once charged a 50-cent newspaper on a credit card, the concept of carrying around much actual green currency has become almost foreign, not to mention unnerving. Frequent trips to the ATM to withdraw small amounts of cash are a way of life. Apparently, I'm not alone.

There are more than 1 billion debit/ATM cards in circulation, and future sales are projected to double by 2007. Today, Visa announced that debit/ATM card use topped credit card use for the first time, and sales volume grew by 17% to a record $1.48 trillion. This has to be welcome news to electronic transaction processing firms such as First Data (NYSE: FDC  ) as well as automated teller machine (ATM) king Diebold (NYSE: DBD  ) , which reported first-quarter earnings today.

Diebold, the onetime vault and safe maker, traces its origins back to 1859. Today, the company manufactures, markets, and maintains a broad array of self-service transaction machines, principally ATMs, as well as retail, medical, and biometric systems and integrated security solutions.

Diebold controls roughly two-thirds of the North American ATM market, and trails only rival NCR (NYSE: NCR  ) in global sales. Changes underway in the market should boost future sales. As expected, the next generation of ATM technology offers advanced functionality. New machines accept checks and cash without envelopes, and check imaging allows expedient electronic transmission and processing of deposits. In compliance with recently enacted legislation, enhanced security features and voice guidance for the visually impaired will also be implemented.

All this bodes well for Diebold's service and maintenance revenues. Approximately 80% of Diebold's ATM sales, which now account for more than half of total revnues, are accompanied by service contracts. By nature, service work is not capital-intensive, and the recurring revenue generated is driving free cash flow of $225 million to $250 million annually.

Diebold is also the world's leader in electronic voting systems. Jurisdictions trying to avoid another "hanging chad" fiasco like the 2000 presidential election have placed more than 33,000 Diebold touch-screen voting stations in operation, replacing dilapidated voting equipment. Ongoing political debates have led to delays in the continued rollout of the Accu-Vote TS units, but election-related sales still grew 111% year over year in the first quarter and are projected to exceed $80 million this year.

First-quarter revenues released this morning rose 21% to $498.3 million, reflecting strength in both the self-service and security solutions segments. Net income increased 12% to $29.1 million, or $0.40 per share, in line with estimates. Fiscal year 2004 EPS estimates of $2.63 translate to a forward P/E of 17 -- not bad for a company with ample cash, little debt, and strong growth prospects both domestically and overseas.

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Fool contributor Nathan Slaughter couldn't survive without ATMs, but he owns none of the companies mentioned.


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