Strategic Shifts Promise Growth Amid Analyst Concerns Over Future Profitability

Key Takeaways

• Introduction of a new CFO and updated 2024 outlook indicate a strategic pivot towards increasing profitability, margin expansion, and improved cash flow.
  
• Continuous improvement programs, significant banking product growth, and operational efficiency efforts are set to enhance revenue, gross margin, and profitability.
  
• Exiting lower-margin businesses and unpredictable government contracts may affect both revenue streams and net margins, challenging quarterly revenue linearization strategies.

Catalysts

Engages in the automating, digitizing, and transforming the way people bank and shop worldwide.

• The introduction of a new Chief Financial Officer with a strong track record in leading successful multiyear transformations suggests a strategic shift towards boosting profitable revenue growth, margin expansion, and improving free cash flow, which are likely to enhance net margins and earnings growth.
  
• Diebold Nixdorf's updated 2024 financial outlook reflects higher profitability due to strong year-to-date execution and operational improvements, indicating a potential increase in net margins and earnings per share (EPS).
  
• Implementation of continuous improvement programs and a focus on operational execution, including investment in people and technology (such as a new cloud-based service suite for North America), aims to drive gross margin expansion and operating efficiency, positively impacting profitability.
  
• Significant banking product revenue growth (16% year-over-year) and gross margin improvement, driven by innovation and the adoption of recycling technology in ATMs, suggest a robust demand for Diebold Nixdorf’s products, potentially leading to higher revenue and gross margins.
  
• The commitment to a more linear and disciplined approach to business management is expected to reduce quarterly volatility in free cash flow, supported by strategic initiatives such as supply chain and logistics improvements. This could lead to better working capital efficiency and stronger free cash flow generation, enhancing Diebold Nixdorf’s overall financial health and investment appeal.

Assumptions

• Analysts are assuming Diebold Nixdorf's revenue will decrease by -0.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 56.7% today to 0.5% in 3 years time.
• Analysts expect earnings to reach $18.8 million (and earnings per share of $0.66) by about September 2027, down from $2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 146.3x on those 2027 earnings, up from 0.7x today. This future PE is greater than the current PE for the GB Tech industry at 18.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.98%, as per the Simply Wall St company report.

Risks

• The decision to exit lower-margin third-party sales in the Retail sector could decrease overall revenue and impact net margins.
  
• The slowdown in customer decision-making within the Retail sector, attributed to a more holistic view of checkout solutions, may lead to unpredictable revenue streams and impact earnings.
  
• Retail performance being impacted by product market headwinds, indicating a potential challenge in maintaining or growing revenue in this segment.
  
• A dependency on large government contracts in Brazil for growth introduces risk due to the inherent unpredictability and lengthy procurement cycles of government tenders, potentially impacting revenue predictability and cash flow.
  
• The strategy to linearize quarterly revenue might face challenges if market demand does not align with expectations, impacting both top-line growth and net margins.

Valuation

• The analysts have a consensus price target of $57.5 for Diebold Nixdorf based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.8 billion, earnings will come to $18.8 million, and it would be trading on a PE ratio of 146.3x, assuming you use a discount rate of 9.0%.
• Given the current share price of $43.12, the analyst's price target of $57.5 is 25.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.