One of my favorite playthings as a kid was a little toy safe with the words "Diebold Jr." displayed on the door above the little red dial. Diebold (NYSE:DBD) began manufacturing safes and vaults for banks in 1859.
The Ohio-based company still makes safes and vaults, but has evolved into a leading global provider of Automated Teller Machines (ATM's). Diebold even protects national treasures including the original Declaration of Independence, the Constitution and Bill of Rights at the National Archives in Washington, D.C. The company that protected my coins in the little toy safe now protects the most sacred documents of American democracy.
Twenty years after Diebold began making safes in Ohio, another Ohio company began manufacturing the first mechanical cash registers in 1879. That company became The National Cash Register Company (NYSE:NCR). Today, the two companies compete in what is known as the financial self-services industry. NCR is the world's largest manufacturer of ATMs, while Diebold holds the title in the U.S. A German company, Wincor Nixdorf(NYSE:NCR) is ranked second worldwide in terms of volume of ATMs shipped.
No industry has been hit by change over the past few years quite like the ATM industry and there is no end in sight. Diebold and NCR will benefit from EMV, which will phase out magnetic strips replacing them with embedded chips. The chips are already common in Europe. Many ATMs in the U.S. will need to be upgraded to accept the chips. Both American companies will also benefit from the decision by Microsoft to stop supporting Windows XP in favor of Windows 7. These changes will boost sales the same way the American with Disabilities Act increased domestic sales by requiring upgrades to existing ATMs.
Diebold and NCR will continue to fight for market share in emerging markets where Wincor Nixdorf poses another challenge. Wincor's sales were up for the first nine months of this year driven by an increase of 20% in the Asia/Pacific/Africa region. A key factor in determining who comes out on top will be service performance. Satisfied customers renew contracts and buy more products.
The X factor may be Diebold's focus on growth in the electronic security segment. According to Diebold's EVP of electronic security Tony Byerly, Diebold has a lot of opportunity to increase market share on the systems integration side by leveraging Diebold's relationships with financial institutions. The company is also extending its customer base beyond retail banks into commercial business. So far this year, Diebold has added more than 30 national and global commercial customers
Former HP executive Andy Mattes was named CEO of Diebold in June of this year. Mattes sees a huge upside for the company's growth in global markets, but he is not putting the cart before the horse. In August he announced a major overhaul to the company's IT infrastructure, acknowledging the pressure the move will have on near-term P&L. The new CEO also signed on to an existing plan to cut expenses by some $150 million.
Other signs point to near-term price pressure. Mr. Mattes is ripping off the bandage from wounds which have hurt the stock price. Diebold paid $48 million to US to settle a bribery case and settled a class action suit that grew out of derivatives trades. Putting these issues behind them will help the company focus on the business at hand.
When money moved closer to people from banks to ATM's, the safe maker and the cash register maker adapted and grew. Now they protect transactions in the palm of your hand as they work to meet the insatiable demand for electronic security in the digital age and compete for global business in booming emerging markets. This game will be worth watching.
Feel free to steal my joke and tell your friends you heard about a "safe" investment. If they're slow you may have to add, "the company make safes!"