Buy NCR

I recently bought a small bundle of groceries at a mid-sized IGA supermarket in Ulster County, New York, and I noticed a sharp increase in prices.  I also overheard the checkout staff discussing the phase-in of New York's minimum wage, which is now $11.10 outside of the city and $15 in the city.  It will increase upstate  to $11.80 next December 31 and $12.50 on New Year's eve 2020.

Large retailers like Home Depot have been experimenting with checkout scanners for many years. They work well there, but Hannaford's, an upstate supermarket chain that is larger than the mid-sized market, is still working on perfecting its checkout equipment.   The mid-sized market has yet to purchase automatic checkout equipment.

The virtue of automatic checkout equipment is that it eliminates jobs.  As wages rise above the equilibrium level, employers look for capital investments that will net positive returns.  The firms become less profitable because it was preferable to employ human labor before the minimum wage, but it becomes more profitable to substitute capital for labor, albeit at a lower level of profit, following the minimum wage mandate.

This puts larger chains like Home Depot and Wal-Mart at a competitive advantage over smaller firms like Hannaford's because the large firms' cost of capital is lower.  Larger firms have greater net worth, so they pose less risk to lenders.  Larger local firms like Hannaford's, of course, have a corresponding advantage over mid-sized supermarkets like the Boiceville market.   In turn, small retailers have less of an advantage still. Moreover, Dollar General, a national chain of discount stores based in rural communities, likely has an advantage over non-chain local stores because of its lower cost of capital and higher sales per store.

In this mix, there is untapped demand for electronic checkout equipment.  There are several leading manufacturers, but according to Outsider Club, "NCR leads the world in self-checkout and point-of-sale technologies."  NCR is undervalued, but it is currently losing money; hence, it does not have a price-earnings ratio.  In 2015 NCR had invited Blackstone to invest in preferred shares, and NCR then repurchased its own shares, increasing the risk level of its common stock. In June 2018 Robert Honeywill wrote in Seeking Alpha: "At some stage Blackstone will likely exit the remainder of their position in NCR. This event, and ongoing share repurchases, may provide an opportunity for savvy common stock shareholders." Honeywill adds, concerning the share repurchase policy:

Repurchasing common stock, particularly at an excessively high price, rather than reducing NCR's borrowings, advantages the preferred stock holders, while significantly increasing risk for ordinary shareholders.  

That said, Honeywill likes NCR because it is a powerful cash generator.

It is unclear whether other states will imitate New York's high-minimum-wage, high-unemployment strategy.  However, local minimum wage increases in a number of blue states will likely stimulate strategic thinking about checkout technology.  There's a reason why tech company executives swing left.  Given that I will be paying higher supermarket prices, I decided to hedge my risk and bought NCR.