Wall Street Catches On to NCR

I'll never really understand the process behind Wall Street's upgrades and downgrades, or why investors really pay much attention to the "Experts'" price targets or sudden changes of heart with regard to a particular stock. For example, on Wednesday an analyst at Goldman Sachs upgraded NCR (NYSE: NCR), the world's leading maker of ATMs for banks and a top player in making cash registers for retail operations. The analyst lifted his recommendation from a hold to a buy and raised his price target on the stock to $23 from $18. NCR's share price leapt upward, climbing nearly 5% on news of the upgrade.

To be fair, I agree completely with the Goldman analyst's thesis on the company that prompted the upgrade, and he provides some great data, but as of yesterday's close the stock is up 29% for the year. The thesis hasn't really changed, but the stock has become a lot more expensive. In fact, since I slapped my Foolish seal of approval on the stock at the end of October, it is up 41%. Still, NCR's core business remains strong, as do the company's growth prospects, so let's take a look at whether it'd be wise to still be a buyer after NCR's strong run-up.

Most recent quarter
I believe much of the discount that was being priced into the stock over the past year had to do with the company's DVD kiosk business. To consumers this is perhaps NCR's most visible product; it partnered with now-bankrupt Blockbuster to compete with Coinstar (Nasdaq: CSTR) in what many believe will become a defunct physical DVD distribution business. The business certainly does face some challenges, especially of the Netflix (Nasdaq: NFLX) variety, but it is still expected to grow by 37% this year. Regardless, NCR's DVD distribution revenue is a very small piece of the pie and was never a main reason for my recommendation of the stock. It appears that other investors have caught on since there was very little reaction to Coinstar's terrible fourth-quarter report.

The core
NCR's ATM business remains extremely strong both here and abroad. The company sold 75,000 of its SelfServ ATM machines in 2010, which is more than double the total sales in 2008 and 2009 combined. Growth is especially robust in emerging markets, where ATM growth is now far outpacing the mature market domestically. NCR continues to win market share in China, which is expected to be the largest ATM market in the world within the next five years. The country's top five commercial banks are now customers of NCR, and as these banks continue to grow, so too will NCR's order book. In addition, its operations in Brazil, which are boosted by its manufacturing presence in Manaus, saw orders increase by over 100% in 2010.

While international ATM growth is the driver of future growth, domestically many banks are upgrading to some of NCR's newer ATM models as customers demand more banking options. Bank of America (NYSE: BAC) and JP Morgan's (NYSE: JPM) Chase Bank each finished installing more than 10,000 new machines. In addition, NCR recently announced a new deal with Chase Bank to install hundreds of new ATMs with its single slot technology, which allows consumers to deposit checks and cash in a single slot simultaneously. Wells Fargo is also in the process of piloting new models at hundreds of locations nationwide.

Retail
The retail checkout market may be even a bigger opportunity for the company. NCR is already a leader in the technology and manufacturing of retail sales terminals, where competition is even stiffer. However, the market continues to expand as many retailers and grocery chains are attempting to cut costs by adding self check-out terminals. NCR already has deals with large retail names like Home Depot, Lowe's and Wal-Mart. There are still relatively very few retailers that employ this technology, so the opportunity is immense if NCR can continue to win business and build strong relationships. Annual growth in this space was 43% in 2010 for NCR, and management expects further acceleration this year.

Still compelling
NCR still has some very compelling growth opportunities over the next few years, but the stock has had a pretty good run since I first recommended it and is not as much of a value play at these levels. Despite many of the positives facing the stock, I'd advise investors place it as a hold, but I'll still be watching closely to see how the company continues to progress early this year.