NCR’s 3.6 percent rise in its stock price on Thursday came as little surprise to the smart money crowd. The ATM and cash register maker has become a hot hedge fund stock of late. On May 14, David Einhorn’s Greenlight Capital reported it had taken a 5.1 percent stake in the company. He filed this in a 13-G, meaning it is a passive — not an activist — position. Einhorn, however, is one among a large number of smart, high profile hedgies to make initial investments in the stock in recent months, or add to their positions.
For example, Steve Cohen’s SAC Capital boosted its stake by about 56 percent in the first quarter, making it the sixth largest holder of the shares. Fir Tree, run by Jeffrey Tannenbaum, bought all of its shares in the first quarter to become the eighth largest holder.
Other hedge fund firms that took new positions in NCR in the first quarter included Eric Mindich’s Eton Park Capital, Ken Griffin’s Citadel Advisors, Wayne Cooperman’s Cobalt Capital Management, Catapult Capital Management, which is part of Izzy Englander’s Millennium Capital Management; Davidson Kempner, and Bruce Kovner’s Caxton Associates. In other words, a bunch of hedge fund honchos.
So, why are these hedge funds so interested in a company that makes ATMs and cash registers? It seems they are attracted to a number of other factors. For one thing, NCR has launched a DVD rental business to compete with those increasingly ubiquitous Red Box dollar rental machines. But, that’s just a small part of the story.
The hedgies think the stock is way undervalued, closing Thursday at $13.24. JPMorgan Chase’s analysts recently upped their target price to $19 and one analyst says some people believe the stock is worth $20 on a break-up value analysis. They believe the base business is worth about $21 per share, if you compare its valuation to competitor Diebold. The DVD business is said to be worth $1 to $2 per share. It also has another $2.50 or so of cash on its balance sheet.
Now, keep in mind that NCR has an underfunded pension fund to the tune of $1 billion. So, this brings down the value to about $20 per share for the stock. So, we’re talking about a potential 50 percent gain. Here is another wild card. About $2.5 billion of its $4 billion in total pension assets are in equities. So, whenever the stock market in general goes up, NCR’s shares seem to rise more, and vice versa. Sort of like a closed-end mutual fund.
Perhaps the hedgies are figuring on a takeover of NCR, especially now that private equity funds are flexing their muscles again. “A lot of hedge funds are looking for big upside,” says Wedbush Morgan Securities analyst Gil Luria. Although the stock is still well below that $19-20 level, my bet is that the smart money crowd knows what it is doing.
Stephen Taub, who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines.
