DIEBOLD INC. $27 (New York symbol DBD; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 66.3 million; Market cap: $1.8 billion; Price-to-sales ratio: 0.6; Dividend yield: 3.9%; WSSF Rating: Average) makes automated teller machines (ATMs), as well as safes, vaults and building security systems.

To cut its reliance on ATMs and related equipment, Diebold is offering more services to its banking customers. These include managing ATM networks, processing customer transactions and upgrading software. Diebold now gets over half of its revenue from these types of services.

The company recently sold its electronic-voting machine business (Premier Election Solutions, Inc.) for $12.1 million. That’s a lot less than the $24.7 million that Diebold paid for this business in 2002. If you account for the money that the company invested into this subsidiary over the years, Diebold incurred a $50.8-million pre-tax loss on the sale.

Diebold was repeatedly sued over claims that the machines were inaccurate, so selling this business should improve its image and cut its risk.

Olympics spurred ATM sales

The company’s revenue rose from $2.4 billion in 2004 to $3.2 billion in 2008. Strong ATM orders from Chinese banks ahead of the 2008 Olympics were a major reason for the gain. However, earnings fell from $2.54 a share (or a total of $184.0 million) in 2004 to $1.62 a share (or $108.0 million) in 2007.

The company began cutting its costs in response to the falling earnings. This included shifting 85% of its ATM production to low-cost countries, such as China and Hungary. It also cut its distribution network in the U.S. from 89 warehouses to three major centres. These moves helped Diebold’s 2008 earnings rebound to $2.61 a share (or $173.5 million).

Diebold’s cost cuts should save it $200 million a year by the end of 2011. That should let it keep spending around 3% of its revenue on research.

This spending has led to several innovations in the past few years. For example, Diebold’s new ATMs can scan a stack of cheques for deposit, add them up and allow the customer to verify the total. This saves customers the inconvenience of submitting each cheque separately. New scanning technology also speeds up cheque clearing, and cuts down on fraud.

Diebold’s strong balance sheet also adds to its appeal. Its $567.4 million of long-term debt is a manageable 32% of its market cap. As well, savings from its cost-cutting plan will give it more cash for debt repayment. Moreover, it holds cash of $385.0 million, or $5.81 a share.

Growing demand for ATMs from banks in China, India and Brazil should offset slow sales in the U.S. and Europe. As well, overseas markets account for half of Diebold’s revenue, so it stands to gain from the falling U.S. dollar. The stock trades at 15.3 times the $1.77 a share that Diebold should earn in 2009.

Diebold is a buy.