[LINK] The trouble with e-voting

Bernard Robertson-Dunn brd at austarmetro.com.au
Tue Aug 31 08:51:28 EST 2004

The trouble with e-voting
Political concerns have held back shares of Diebold, which makes touch
screen voting machines.
August 30, 2004: 12:40 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Considering all the controversy about hanging chads
and butterfly ballots four years ago, you would think a company that makes
electronic voting machines would have a banner year in 2004.

But for Diebold, the largest manufacturer of touch screen voting machines,
that hasn't been the case.

The company came under fire last year for a letter that Diebold CEO Walden
O'Dell wrote as a fundraising pitch to Republicans. In the letter, O'Dell
said he was "committed to helping Ohio deliver its electoral votes to the
president." Diebold is based in North Canton, Ohio.

To quell criticism, Diebold amended its corporate ethics policy in June,
barring top executives, including O'Dell, from contributing to political
candidates or parties or participating in any political activities except
for voting.

But that's not the only knock against the company. A lawsuit was filed
against Diebold last year in California alleging that software flaws makes
the voting machines vulnerable to hacker attacks and computer viruses.
There are also concerns about the lack of a verifiable paper trail with
electronic voting.

Mike Jacobsen, a spokesman for Diebold said that Diebold has never had
security lapses with any of its voting machines but that it has nonetheless
taken extra steps during the past few months, including adding enhanced
encryption technologies, to ensure that there are no problems this

Jacobsen said that between 8 million and 9 million registered voters in
parts of Georgia, Maryland and California would be using its machines this
November. He added that the federal government would hopefully issue more
guidelines about standards for electronic voting, including the need for a
paper trail, in the coming months.

A lost opportunity Still, the lingering headaches associated with this
business have hurt results. Diebold has said that it expects election
systems revenue of about $75 to $85 million for the full year, down from
$100.2 million a year ago and $111 million in 2002.

Diebold also makes automated teller machines (ATMs) and security devices
like safes and vaults for the financial services industry, and voting
machines account for about 3 percent of its business.

The company has said that the election systems business should have a
neutral to slightly dilutive effect on overall profits in the third
quarter. Translation: At best, the unit will break even. A year ago, the
business helped boost net earnings by 6 cents a share.

So to some, this year's problems amount to a wasted opportunity.

"This year, Diebold is losing money in the U.S. voting machine business,"
said Donald Taylor, manager of the Franklin Rising Dividends fund, which
owns shares in Diebold. "A lot of issues on the voting side of Diebold's
business are dissipating but it's too late to help results for 2004."

Some hold out hope, however, that more states will begin to replace older
voting machines within the next few years and that this could be a boon for

"We'll be looking for an uptick in the voting business in 2005 and the next
couple of years," said Matt Summerville, an analyst with Keybanc Capital
Markets, adding that Diebold is in the running to win orders for voting
machines in Illinois, Ohio and Utah.

Summerville thinks that it wouldn't be a stretch for the unit to eventually
generate more than 10 percent of Diebold's overall revenue. Analysts
estimate that Diebold controls about 50 percent of the electronic voting
machine market, which could generate between $1 billion and $2 billion in
revenues over the next few years.

Sequoia Voting Systems, owned by British printing firm De La Rue, and
Election Systems & Software (ES&S), a private company based in Omaha, are
two of Diebold's top competitors in this business.

Small sales...big publicity But what's more frustrating for investors is
that the focus on the relatively small election systems business has
overshadowed Diebold's strong position in ATMs and security devices.

"The election controversy has had a negative impact on Diebold's stock,"
said Kartik Mehta, an analyst with FTN Midwest Research. "The remaining 97
percent of the business is doing extremely well."

NCR, Diebold's top ATM competitor, has soared in the past year while
Diebold has struggled. Diebold is expected to report earnings increases of
about 13 percent a year for the next few years, slightly lower than the
projected long-term growth rate of 15 percent for its top competitor in the
ATM business, NCR.

But shares of Diebold (DBD: Research, Estimates) are relatively flat over
the past year and trade at just 16 times earnings estimates for 2005 while
NCR (NCR: Research, Estimates) has surged nearly 60 percent during the past
12 months and has a P/E of about 23.

Mehta thinks that this valuation leaves little downside for the stock, even
if there are more problems surrounding e-voting this November. "Risk is
pretty much priced out of the stock at this point in time. The market has
already discounted any type of election or voting controversy," he said.

But Franklin's Taylor wonders whether it's worth the hassle for Diebold to
stay in the election terminal business. He thinks that even though the
company has now barred executives from engaging in political activities,
that won't completely silence the company's critics.

"If you get into next year and Diebold's ownership is still a problem, the
company should be able to sell it. I don't think they are absolutely wedded
to the voting machine business," said Taylor.

Jacobsen said, however, that Diebold is committed to the election systems
business, pointing out that there is also strong potential for growth
internationally. Diebold has a subsidiary in Brazil that makes voting
machines used in that country.

Analysts quoted in this story do not own shares of Diebold and their firms
have no investment banking relationships with the company.

Trust, but verify. 
-- Ronald Reagan


Bernard Robertson-Dunn
Canberra Australia
brd at austarmetro.com.au

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