On Monday, NCR (NYSE:VYX) Atleos Corp. (NYSE: NATL) received a new Buy rating from Compass Point, accompanied by a price target of $57.00. The financial firm's decision is based on a forecast of NCR Atleos' free cash flow (FCF) reaching $418 million by the end of fiscal year 2026 and a market capitalization/free cash flow (MC/FCF) multiple of 10.0x.
Currently trading at $32.23, the stock has shown strong momentum with a 32.7% year-to-date return, according to InvestingPro data. While Compass Point's target suggests a substantial upside, the current analyst consensus ranges from $33 to $48.
The rationale behind this bullish outlook is threefold. Firstly, NCR Atleos, which holds a 36% market share in the ATM sector, is considered to be in a strong market position and well-equipped to benefit from the increasing demand for managed services and ATM as a Service (ATMaasS) products.
While InvestingPro analysis shows the company currently faces profitability challenges with negative earnings in the last twelve months, analysts expect positive earnings of $3.21 per share in fiscal year 2024. The firm anticipates that NCR Atleos' average revenue per unit (ARPU) will rise from 5.1 in 2024 to 5.9 by 2026 in the self-service banking (SSB) segment.
Secondly, Compass Point argues that the consensus on Wall Street may be underestimating NCR Atleos' strategic direction. The consensus forecasts for 2025-2027 are viewed as too conservative, which could lead to an undervaluation of the company's future free cash flow and the potential for a share buyback program in mid-2025.
The third reason for optimism is the expected improvement in the company's return on invested capital (ROIC), which is projected to increase from 6.3% in 2024 to 11.9% in 2026. Despite NCR Atleos currently trading at a 10% MC/FCF discount compared to its closest peers, the forecasted growth in free cash flow and profitability enhancements are expected to justify a premium valuation in the future.
The transformation of NCR Atleos towards a more capital-light business model, reducing its reliance on hardware sales, which are predicted to account for 19% of total revenue in 2024 estimates, is also highlighted as a positive change. This shift is believed to align with current industry trends, where NCR Atleos is outperforming with a 9% growth in cash withdrawals compared to the industry's 1-2% growth.
The company's revenue growth of 3.58% and current ratio of 1.07 support this transition, according to InvestingPro data, which offers additional insights through its comprehensive financial health scoring system.
Compass Point suggests that investors who are overly focused on cash trends may overlook the opportunity presented by NCR Atleos' significant free cash flow growth, which is currently undervalued by the market.
In other recent news, NCR Atleos Corp secured $400 million in new financing, boosting its financial flexibility. The company's Q2 earnings surpassed expectations, with an adjusted earnings per share of $0.81, although revenue slightly missed the anticipated $1.1 billion. The full-year 2024 guidance was revised to an EPS of $2.90-$3.20 on revenue of $4.26-4.34 billion.
In the realm of analyst ratings, DA Davidson maintained a Buy rating on NCR Atleos, whereas Goldman Sachs and Stifel held neutral stances. Stifel set a $31 price target, expressing cautious optimism about the company's growth trajectory.
In addition to financial developments, NCR Atleos introduced a feature allowing LibertyX customers to sell bitcoin and withdraw cash from ATMs across the United States. This is part of the Atleos ReadyCode API suite, aimed at simplifying transactions from digital to physical currency. The company also made progress in its ATM as a Service strategy, successfully transitioning 1,300 units in Q2.
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