Final Trade Detail
- The company has posted negative free cash flow for two consecutive years.
- Debt has climbed since 2016. The two major bond rating agencies have classified Diebold Nixdorf's debt as "junk".
- The company's shares have increased 4-fold since the start of the year. We don't believe shares warrant a premium given the company's revenue decline and earnings outlook.
I haven’t used an ATM this year. In fact, I can count on one hand how many times I’ve used an ATM – or cash for that matter – in the past two years.
For the majority of Americans, we’ve gone digital with our transactions. We use Apple Pay, Venmo, PayPal, or a simple credit card swipe to transact. Our need for cash has disappeared. So has the growth for one of the world’s largest ATM suppliers – Diebold Nixdorf
Diebold Nixdorf Software began manufacturing safes and bank vaults 160 years ago (established 1859). More recently they have specialized in the manufacturing and servicing of ATMs and Point-of-Sale terminals. We estimate that the company controls approximately 34 percent of the global ATM market. The company generates roughly 61% of its revenue from servicing these machines, with the remaining coming from product sales.
At first glance this doesn’t seem like a terrible company. However, once we begin to peel back the layers of this onion, the picture isn’t quite as rosy.
In 2016, Diebold completed its acquisition of Wincor Nixdorf. Debt has continued to pile up since the acquisition. The company’s long-term debt currently stands at approximately $2.3 billion, up from $532 million before the acquisition of Wincor Nixdorf.
Last year Standard & Poors lowered the company’s issuer rating to B, from BB–, with a negative outlook. Moody’s had a similar outlook on the company’s ability to pay debtholders, lowering their rating to B3 from B1 with a negative outlook. All of the bonds issued by Diebold Nixdorf are considered speculative, high-risk, and essentially “junk” by these ratings agencies.
If debt holders fear that the company may not have the ability to repay their debt, what hope do shareholders have when holding common equity? Shares of the company traded at $2.49 to start the year, but have since rallied to over $10 at the time of this writing. We think this rally is unsustainable.
Let’s look at the fundamentals for a minute. In its most recent quarterly earnings filing, revenue was down 3%. Instead of the $0.35 per-share loss that Wall Street had forecast for the stock, Diebold reported that it lost $1.74 per share last quarter. Sales for the quarter likewise fell short of estimates. The company has also posted negative free cash flow the past two years.
On a positive note, the company does anticipate returning to breakeven by the end of 2019. Does it matter? Probably not.
The only chance of survival is to reduce costs, sell off assets, and try to salvage what’s left of a business that’s losing market share. Maybe a private equity firm will toss a hail mary, or NCR – the company’s largest competitor – will seek recognize strategic value in owning Diebold Nixdorf. We’re less optimistic of this turnaround story.
We recommend buying January 2020 $10 puts for up to $2 per contract. This means if the company’s shares trade below $8 at the time of expiration in January 2020, we will make a profit. If shares trade above $8, the puts will expire worthless. Buying one put contract for $2 means your maximum risk is $200 ($2 x 100 shares = $200).
Investors with a higher risk tolerance can short shares at the current price of $10.75.