Cardtronics Cashes In On Aggressive ATM Growth Plan

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Theories abound on when and how cash will go the way of the dinosaur. For now, though, most people still like to keep folding money on hand in case they need it.

Consequently, most consumers like to know they'll have quick, convenient and reliable access to cash via ATMs and other cash-dispensing machines and services.

Cardtronics ( CATM ) is one of the companies making sure cash is readily available. It's the world's biggest nonbank automated teller machine operator, with more than 81,000 retail ATMs in North America and Europe, and also manages some ATMs on behalf of banks.

The company provides cash dispensing, bank account balance inquiry and money transfer services as well as bill payment, check cashing and remote-deposit capture services. It has operations in the U.S., Canada, Mexico, Puerto Rico, the U.K. and Germany.

Customers include banking giantsCitigroup ( C ),Bank of America ( BAC ) andJPMorgan Chase ( JPM ), as well as big retail industry namesTarget ( TGT ),Costco (COST),Kroger (KR),Walgreen (WAG) andCVS Caremark (CVS).

Buyout Spree

Cardtronics has spent much of the past year rapidly expanding its operation and market reach, both domestically and overseas.

Its most recent deal came in October, when Cardtronics acquired CGI, a Chandler, Ariz.-based ATM operator of about 1,000 mainly merchant-owned ATMs.

That deal followed Cardtronics' August buyout of Cardpoint, a European ATM services provider that operates as Cashzone in the U.K. and Cardpoint in Germany. That deal brought aboard about 7,100 ATMs in the U.K. and another 800 in Germany.

In all, Cardtronics made five buyouts in 2013. Analysts reckon that the company will keep scouting deals as a way of padding its lead in the nonbank ATM sector.

"Expectations call for a continuation of small tuck-in acquisitions of merchant-owned ATM deployers, with a very active pipeline," noted Barrington Research analyst Gary Prestopino.

On a third-quarter conference call with analysts, Cardtronics CEO Steve Rathgaber pointed out that his company's Q3 acquisitions helped it push past the 80,000-ATM milestone.

The significance of that milestone "can be hard to truly appreciate," he said, until you consider that some of the largest financial institutions have closer to 10,000 to 20,000 ATMs. And since many individual bank branches have multiple ATMs, the actual number of ATM locations is more like 5,000 to 7,000 for big banks.

"Cardtronics, on the other hand, has 80,000 locations, as we typically have one ATM per retailer outlet and we are only in general retail outlets," Rathgaber said. "When you do the math, Cardtronics is present in about 10 times the number of locations of some of the largest banks. That is a powerful and valuable asset for communicating with people."

Cardtronics hasn't only used buyouts to expand its operation and customer base. The company has also scored some impressive wins in recent quarters.

During the third quarter, it signed extensions to provide ATM operating services to Costco andChevron (CVX), securing more than 700 ATMs in 43 states.

Cardtronics added another 600-plus ATMs when it won long-term contracts with three unnamed retailers that previously operated their own ATM fleets. Two of the retailers are in the U.S., while the other is in the U.K.

Follow The Money

One reason size and mass are important to Cardtronics is that the largest share of its revenue comes from surcharges customers pay for using ATMs. The more machines it operates, the more revenue it gets from surcharges.

Cardtronics' second-biggest revenue source is interchange fees paid by banks. These fees are paid to the company for each transaction it executes on behalf of cardholders.

A third source of revenue comes from services such as customizing ATMs with the logos, colors and the customer interface of bank customers.

Cardtronics also gets revenue from smaller banks and credit unions that pay a monthly or annual fee to participate in its surcharge-free Allpoint network.

Customers who bank with financial institutions in the network are allowed surcharge-fee ATM transactions. The idea is to let smaller banks provide ATM services to customers without investing in their own ATM network.

"Cardtronics' bank branding offering and surcharge-free network appeal to national banks, community banks and alternative financial service providers looking for a cost efficient and less capital-intensive way to expand the reach of surcharge-free ATMs available to their customers," JPMorgan analyst Reginald Smith noted in a third-quarter earnings report.

Financially, Cardtronics has a record of delivering solid gains on both the top and bottom lines. It has posted double-digit sales and EPS growth in eight of the last 10 quarters.

The company's third-quarter 2013 revenue rose 15% from the prior year to $228.8 million as acquisitions helped drive strong gains in ATM transactions.

Q3 earnings climbed 28% to 55 cents a share, topping analyst consensus views for 49 cents. Gross margin improved 230 basis points to 33.6%.

Analysts expect fourth-quarter earnings of 47 cents a share, up from 41 cents a year earlier. Full-year profit is seen rising 19% for 2013 and 18% for 2014, with future estimates likely to push higher.

"Recent acquisitions set the stage for above-average growth and guidance raises in the near-term," Smith noted.

Cardtronics shares set a record high of 44.46 on Dec. 23 and currently trade near 43.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BAC , C , CATM , JPM , TGT

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