NCR Corp (NCR): Downgraded as Potential FCPA Issues Add Meaningful Risk – Wedbush

Wedbush analyst Gil Luria is downgrading NCR Corp (NYSE:NCR) to Neutral from Outperform this morning while lowering his price target to $23 (prev. $33).

– The move comes after a WSJ report detailing possible FCPA violations (out last night)

Wedbush believes NCR could grow EPS at a 15% CAGR over the next three years if it is able to avoid the impact of potential Foreign Corrupt Practices Act (FCPA) issues. However, pending more visibility into the impact of the issues raised by the Wall Street Journal online, they believe this growth is at risk and are downgrading shares to Neutral from Outperform.

Firm believes immediate implications could be multi-quarter investigation and potential fines with overall price tag in the single millions to tens of millions. They believe that Diebold’s FCPA investigation which has lasted more than two years and has cost several million dollars may end in a significant fine.

If allegations are true and Chinese business is impaired, $200-300 million of revenue in China may be at risk. Luria believes Diebold may have lost as much as $100 million of revenue in Russia alone following its own FCPA investigation.

Possible broader investigation could put overall emerging market growth at risk as well. Wedbush believes much of NCR’s share gains over the last two years have come in emerging markets, which means growth may be at risk if an FCPA investigation restricts current business practices. They point out that NCR grew its ATM business by 15% between 2009 and 2011 while Diebold grew only 3% over the same period. Firm believes that possible new constraints on NCR and Diebold could drive share gains for companies uninhibited by the FCPA such as Chinese based GRG, Korean Hyosung or Japanese ATM makers such as Hitachi.

Reducing price target to $23 from $33 as new risks from a potential FCPA issue reduce visibility into growth. Wedbush’ target represents an 11x multiple on 2012 GAAP EPS adjusted for the new pension program and amortization of intangibles of $2.12, a 10% discount to comparable DBD based on the less visibility due to an earlier stage FCPA issues.

Notablecalls: FCPA could be a major overhang, not to mention it remains unclear if the DOJ, SEC or Department of the Treasury currently have investigations under way. Last thing investors want to see is international growth slowing (that’s where growth is!).

Another thing to consider is that Mr. Luria is rather well respected in the space. He has been a NCR bull since early 2011 and rightly so. So with him telling clients to sell (with a below market target), the stock will trade down.

Back in 2011 the stock produced a 7-10% move in 2 days on the Luria upgrade.

Also note that Diebold (NYSE:DBD) gapped down 5 pts (-20%) after announcing possible FCPA violations back in 2010. Here’s the release.

I’m thinking the stock will hit Luria’s $23 price target and move below that in the n-t.

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