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NCR (NCR) Continues to Face Headwinds: Should You Offload?

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Are you still holding shares of NCR Corporation in your portfolio? If yes, then this is the best time to dump the stock as chances of favorable returns in the near term are slim.

The stock has underperformed the Zacks Computer-Office Equipment industry in the past six months. NCR’s shares have registered a negative return of 2.68%, compared with the industry’s gain of 14.08%. Let’s delve deeper and try to find out what is taking this Zacks Rank #4 (Sell) company down.



Growth Impediments

Softness in the ATM business could jeopardize NCR’s growth potential, going forward. The ATM markets in the U.S., Western Europe and Japan are more or less saturated. Considering the situation, the company expects demand for ATMs to be roughly flat to down over the medium term. ATMs are generally used by the financial services sector, which is heavily dependent on the macroeconomic situation. During the 2008 recession, the sector was hit hard in the U.S. and Europe.

Though the situation has improved, chances of another economic downturn cannot be ruled out. This could restrict ATM refreshes by banks. NCR expects demand for ATMs in the emerging markets to increase in mid-to-high single digit range over the mid-term, which we believe will not be sufficient to offset the slowing demand in the matured markets. Apart from this, we see increasing pressure from Diebold Inc. (DBD - Free Report) and HP Inc. (HPQ - Free Report) in the ATM space, especially in the Indian market.

NCR has a highly leveraged balance sheet. The company had a long-term debt position of $3 billion at the end of first-quarter 2017 (ended Mar 31, 2017). Thus, it had to constantly generate adequate amount of operating cash flow to service its debt.

NCR’s sales are affected by seasonality, with lower revenues in the first quarter and higher revenues in the fourth quarter of each year. Such seasonal nature of the business leads to fluctuation in cash flows and makes it difficult for the company to determine working capital requirements. These factors make forecasting difficult and may negatively affect the company’s ability to project financial results accurately.

Estimates Moving South

Estimates for current quarter and next quarter have moved south in the past 60 days. The company’s current quarter earnings estimates moved down by 3 cents to 75 cents. Similarly for the next quarter, earnings estimates moved down 1 cent to 93 cents. Given its weak fundamentals and an unfavorable Zacks Rank, it is likely to keep underperforming in the quarters ahead.

Low Return

Given the other unattractive features like low return on capital (ROC) and low return on assets (ROA), the stock looks very unappealing. NCR currently trades at a ROC of 12.2%, much lower than the industry’s average of 18.8%. Notably, the company has an ROA of 7.1% compared with the industry’s average of 12.1%.

Valuation

We note that the stock currently has a trailing 12 month P/B ratio of 9.15. This level compares unfavorably to some extent with what the industry witnessed last year. The ratio is higher than the average level of 7.54 and is towards the higher end of the valuation range over this period. Hence, valuation looks slightly stretched from a P/B perspective.

Last Word

We expect the aforementioned factors to hurt the company’s near-term profitability. Hence, we recommend investors to stay away from NCR shares until its Zacks Rank and estimates improve.

Stock to Consider

A better-ranked stock in the technology sector is Applied Materials, Inc. (AMAT - Free Report) , sporting a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Materials has long-term expected earnings per share growth rate of 16.58%.

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