Shares of NCR (NCR) jumped 2% on Friday as the Seventh Circuit Court of Appeals ruled in favor of the company in a lawsuit related to the cleaning of Fox River.
The court overruled the judgment given in 2009 and 2011 where NCR was required to bear 100% of the cost of cleaning up Fox River. With the current verdict, the court ruled that NCR was not solely liable for the cleanup and the associated costs should be divided among all responsible parties.
In light of the favorable state of affairs, NCR sought reimbursement of excess costs that it has already borne for the cleaning drive from the involved parties. NCR’s Fox River reserve ($95 million as of Jun 30, 2014) and the free cash flows are also expected to be favorably impacted by the judgment.
Notably, in the last reported quarter (second-quarter 2014), NCR reported that net cash provided by operating activities was $80.0 million, up from $31.0 million in the previous quarter. Free cash flow in the quarter came in at $3.0 million.
However, NCR has a highly leveraged balance sheet. Net debt at quarter-end was $3.36 billion compared with $3.38 billion in the previous quarter.
The improving cash flows that NCR is seeing are the result of margin expansion aided by a higher mix of software business. The company provided encouraging guidance, anticipating balanced revenue growth across its business segments, especially the Financial Services segment.
We believe that NCR’s growing exposure to the ATM and self-service kiosk spaces is encouraging, given the tremendous growth prospects. Continued product launches, the growing popularity of its self-service offerings and synergies from acquisitions are the other growth catalysts. Also, the current favorable ruling will positively impact its financials.
However, softness in the ATM business in mature markets, competition from Diebold, Inc. (DBD) and International Business Machines (IBM), and a high debt burden are the concerns.
Currently, NCR has a Zacks Rank #3 (Hold). Investors could also consider another stock, Stratasys (SSYS), which has a Zacks Rank #1 (Strong Buy).
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