How NCR Reinvented Itself to Survive

The best companies for long-term investors are able to reinvent themselves in order to keep up with the times. NCR (NYSE: NCR), which began its history more than 130 years ago as the National Cash Register Company, revolutionized the way sales clerks accepted payment with the first mechanical cash registers. Yet NCR never saw itself as solely a cash register manufacturer, and the company has evolved into a global leader in consumer transaction technology, seeking to offer not only hardware but also software and integrated solutions to make the billions of daily interactions between consumers and businesses run more smoothly and efficiently.

How NCR has evolved

NCR has a long history of expansion beyond its namesake niche. In the 1950s, the company began to pursue electronic applications for business machines, creating the first fully transistorized business computer. Later, advances in liquid crystal displays began the evolution away from fully mechanical hardware toward digital cash registers and other equipment.

In 1974, NCR adopted its current name, recognizing that it needed an identity beyond its cash register roots. Innovations ranging from bar-code scanners to data warehousing products expanded NCR's reach, and AT&T (NYSE: T) bought the company in the early 1990s before spinning off what had become its global information systems unit into an independent company in 1997.

Subsequent strategic moves added to NCR's expertise while focusing on higher-margin opportunities. Over the past 20 years, the company has increased its software and services expertise, differentiating itself from pure hardware providers and taking advantage of demand for cloud computing and data analytics applications. Yet NCR has also aimed at every aspect of business-customer financial transactions, ranging from self-service checkout and point-of-sale transaction technology to more advanced automated teller machines. With the rise in mobile-based payment systems, NCR has correctly seen how mobile devices can play an instrumental role not just in payment systems but in all aspects of how businesses and customers interact.

How NCR has fared lately

Most recently, NCR has adapted to the changing tides of the industries it serves, and its performance reflects this change. The transaction technology specialist has seen a rising share of its sales come from the services it provides rather than the products it sells, with growth rates in 2016 for services revenue quadrupling the corresponding growth in product-based sales. NCR has also been able to reduce the costs involved in providing those services, and that helped boost the company's overall gross margin from just over 23% in 2015 to more than 27% last year.

NCR's 2017 results, in particular, reflect the company's transformation. Hardware-related revenue has been down sharply, largely in response to the sale of the company's interactive printer solutions business, but also because of pullbacks in sales of ATMs. Yet even within the hardware segment, sales of self-checkout machines and mobile-enabled point-of-sale transaction equipment have soared, as retailers seek solutions to improve their own efficiency.

More importantly for the long run, NCR has taken advantage of industry trends allowing it to capture more of its revenue on a recurring basis. The revenue that NCR gets from software licensing fees tends to be extremely volatile, with a 30% rise in the first quarter of 2017 giving way to a 6% drop in the second quarter. Yet NCR's take from cloud offerings and professional services software has steadily increased, and the services segment has been able to help stabilize the company in a difficult environment for much of its customer base with its solid gains.

CEO Bill Nuti is fully mindful of the transformation that NCR has already seen and will continue to experience in the years ahead. Businesses need to be able to handle both in-person transactions and e-commerce, and NCR's omni-channel software offerings aim to make it easier for its business clients to interact with their customers. Mobile and interactive devices offer opportunities not just to make transactions more efficient but also to gather data that businesses can use to identify ways to boost their sales and profits. As brick-and-mortar retailers adapt to the impact that e-commerce has had on the industry, NCR's products and services will need to stay on the cutting edge of innovation in order to help the company's clients compete effectively.

Why NCR is a promising investment right now

In finding strong long-term recommendations, it's often auspicious to identify companies when they're going through short-term challenges. NCR has seen its stock suffer in 2017 because of sluggish sales, with the company posting a year-over-year top-line decline in its most recent quarterly financial report. Many traders seem not to appreciate the lumpy nature of much of NCR's revenue, and the company pointed to expected boosts to software license revenue and greater customer rollouts of automated teller machines in the second half of the year to help make full-year results look stronger. Even so, the stock trades at just 10 to 11 times NCR's adjusted earnings expectations for 2017, and that valuation seems to penalize the company, and indicates skepticism about NCR's future growth entirely.

What's far more important for NCR is ensuring that it stays on the cutting edge of business-customer relationship technology, both in the rapidly evolving payments space and in other applications like self-checkout and e-commerce. In a highly competitive industry, the right tools will create big advantages for their users. If NCR can build on its legacy of innovation to provide those tools, then its combination of expanding scope, dedicated management, and attractive valuation can make it a smart investment for the long haul.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends NCR. The Motley Fool has a disclosure policy.