It would be understandable if investors had difficulty generating much enthusiasm for Diebold
While the company takes in more than 90% of its revenues from ATMs and other financial products and services, the voting-machine division has become the fastest-growing part of the business expanding by more than 123% over last year. Still, it represents just a minuscule percentage of total revenues.
Part of Diebold's problem is that its image becomes wrapped up in politically charged debate. Another is that a certain Luddite contingent opposes the use of advanced computer technology to tally votes. Fearing that elections could be manipulated and undermined by hackers breaking into the system, they stand to thwart any effort to bring the electoral process into the 21st century.
Diebold is also the subject of an SEC inquiry into its revenue-recognition practices. It had earlier this year announced that the inquiry was informal, but buried in its most recent quarterly report was an announcement that it's been upgraded to a formal inquiry. The company didn't provide many details on what the regulatory agency is looking at. Diebold had previously said the focus was the voting-machine division. But since its voting-machine sales are based on multiple parts that have custom terms, there's probably a lot of room for subjective interpretation, and that could ultimately lead to a restatement of its financials.
So why do I think now would be a profitable time to invest? A company with a storied, 145-year history is not to be dismissed lightly. Even if I heavily discount how long it's been around, Diebold is changing with the times. Earlier this year, it appointed a new CEO who immediately began implementing a three-year, $100 million cost-savings plan. Excluding the restructuring charges, Diebold expects earnings to be as much as $1.83 per share, up from the previous estimate of $1.71 per share. Revenue growth is also expected to grow by 4% to 7%, with election-systems growth being spurred by upcoming elections.
The company is also expanding its presence overseas and has just announced a deal with China Construction Bank for 1,200 self-service machines. International sales grew by 16% in the quarter and account for 40% of total revenues. Though Diebold lags NCR
Diebold has more than $200 million in cash and short-term investments available to it and it once again increased its dividend, which has an annual 2.1% yield. The company also bought back more than 1.9 million shares in the quarter and still has 1.3 million shares remaining under the repurchase agreement. While security concerns about hacking into vote-tallying machines will continue to be problematic -- and it didn't help when Diebold's former CEO talked about delivering votes to President Bush during the last presidential election -- the fact remains that electronic systems will become commonplace. And Diebold has a chance to capture a large portion of the market.
With the stock sitting some 16% below where it was trading last year, when I cautioned about buying it, I find its current valuation to be not unreasonable. It trades at 22 times this year's earnings and only 16 times earnings in 2007. You're not getting it at bargain-basement prices, to be sure (for example, NCR trades at 17 times this year's earnings and 14 times next year's), but you're paying for a company that is financially sound and stable. Sales have grown at around 8% annually for the past few years, but expenses have eaten into profits. The cost-cutting program being implemented should therefore help boost earnings.
Undoubtedly, it's not easy pickings here, because there are hurdles to cross, but I find security-flaw concerns overblown and the continued growth of its ATM business promising, both home and abroad. You could say I'm casting my vote for Diebold.
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