The stock market's torrid three-month rally, led by information technology stocks, has cooled just in time for summer, and IT stocks also have felt the chill. But tech names are bound to lead the parade again when the market rebounds, tech analysts argue.
The recent pullback in share prices makes tech stocks even more attractive as the nascent economic recovery gains traction, according to some pros.
NCR ( (NCR)
), which makes and services technology hardware and software largely for retail and financial companies, is one global tech company that some investors find attractive because of its valuation, free cash flow
, and financial flexibility. Among NCR's products are ATMs and financial terminals, self-service retail kiosks, and bar-code scanners.
Helped by Cost-Cutting Automation
The economic downturn, however, has put pressure on NCR's earnings; for the first quarter, the company posted a loss amid weak revenues. That's one reason why six of the eight analysts who follow NCR rate its stock a hold, and only two recommend buying the shares.
But given NCR's "robust business model, aggressive cost-cutting measures, and new business initiatives," says analyst Ian Gilson of
, "we expect the company to resume growth across segments later this year." Gilson rates the shares a buy.
The stock, down from its 52-week high of 28 on July 29, 2008, is now trading at 11. Gilson believes that in six months NCR will hit 14. He predicts that as the company's customers seek to cut costs through increased automation, its efforts to ramp up new business will take hold.
"Despite the near-term moderation in economic growth that we foresee, we think customer demand for ATMs and retail kiosks will pick up by 2010 because automation should remain part of customers' cost-saving and product differentiation strategies," says Thomas W. Smith, an analyst at
. (S&P, like BusinessWeek
, is a unit of the McGraw-Hill Companies ( (MHP)
).) He rates the stock a hold because of the downturns experienced by NCR's retail and financial customers.
Global Leader in ATMs
Indeed, NCR experienced a significant drop in business activity in its retail segment in the second half of 2008, which spilled over into the first quarter of 2009.
Nonetheless, Zacks' Gilson notes that the company has been the global market-share leader in self-service ATMs for 23 consecutive years, remains No. 1 in North America, and has retained its lead in such key worldwide markets as China. Strong demand for ATMs in emerging markets has helped its global sales growth.
Although overall revenue rose at a "moderate" 6.9% clip in 2008, vs. 15% in 2007, "it was still a healthy growth given the overall downturn in the global economy," says Gilson. Revenues in 2008 rose to $5.3 billion, up from $4.9 billion in 2007. Gilson expects revenues to slip to $4.5 billion in 2009 and $4.6 billion in 2010. Earnings are also expected to ease in 2009, to $1 a share, then rise to $1.31 in 2010.
To counter the decline in demand from its retail industry customers, NCR is expanding the reach of its self-service business by targeting new areas such as health care, travel, and hospitality. It has gained new business in New Zealand and Mexico, notes Gilson.
The analyst is encouraged by NCR's sound balance sheet and the strong cash flow the company generated in the first quarter. Its free cash flow in the first quarter was $13 million, with cash and cash equivalents on hand of $717 million and debt of $308 million.
Also positive on NCR is independent research outfit ValuEngine, which rates the stock a buy. The attractive valuation of the shares, which trade at a modest price-earnings ratio of 8.6, make it likely they will outperform the market, says ValuEngine. NCR should trade at 12.41 a share, according to the firm.
As one of the more undervalued tech plays, NCR has already attracted some of the biggest institutional investors, including
, which owned an 8.7% stake as of Mar. 31, 2009, and Barclays Global Investment ( (BCS)
), with 5%, according to
. NCR holds the promise of being a cash machine for investors once the economy—and investors' appetite for tech stocks—ratchets up again.
Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.