With the pound at historic lows and economic uncertainty at its peak, it makes sense that financial institutions have been having a hard time in the wake of the Brexit. Deutsche Bank (NYSE: DB) is down over 21% and Barclays (NYSE: BCS) has plummeted nearly 32% since June 23.

However, in this week’s Project Alpha I’m going to tell you about a small-cap financial services company that was hardly impacted by the Brexit. In fact its recent decision to redomicile, or move its location of incorporation from the United States to the UK, might actually improve margins due to tax benefits. 

#-ad_banner-#​Cardtronics (Nasdaq: CATM) is the no.1 deployer of non-bank ATMs in the world, and provides automated consumer financial services through its multi-function kiosks. 

The firm currently operates over 190,000 devices globally for notable retailers and financial institutions including Target, 7-Eleven, CVS, Walgreens, Bank of America, Chase and Wells Fargo. These clients outsource their ATM functions to Cardtronics, which provides services such as machine maintenance, device branding and cash transportation and upkeep.

The company’s ATMs are usually located in prominent and high-traffic locations, which creates three-sided network effects between financial institutions, consumers and retailers. Financial institutions get publicity and brand promotion through exposure to customers. Consumers appreciate the convenience of being able to easily withdraw surcharge-free cash. Retailers are rewarded with high traffic and increased in-store spending. This mutually beneficial business model has helped Cardtronics lock in its clients and grow its user base at a compound annual growth rate (CAGR) of 15%.

The effects of this self-reinforcing cycle are amplified by trends in the banking industry. Banks across the United States are shutting down branches at an increasing rate. There was a 5% decrease in bank branches from 2009 to 2014, and Bank of America alone cut 10% of its branches in the last two years. These closures have increased because it is becoming increasingly costly for banks to operate physical locations. Instead, it is in the best interest of their bottom line to close these branches while outsourcing ATM functions to Cardtronics in order to preserve convenient access for customers.

Just last quarter, Cardtronics announced that they completed an acquisition of 2,600 quality location ATMs from Chase. This acquisition is regarded as a “tipping point in terms of the way banks are thinking about their ATM business” as according to Andrew Jeffrey, a SunTrust analyst. As other major banks follow suit, the firm will likely see a continued increase in the number of ATMs under its management.

However, the benefits from these trends may seem counterintuitive. After all, isn’t mobile banking on the rise? Aren’t consumers shifting more and more towards a “cashless” society?

While a cashless world might be the end game for currency, it appears that we are far from ready right now.

In the United States, the frequency of transactions by cash has decreased from 32.6% in 2009 to 26.5% in 2014, but this does not necessarily mean that ATMs are being hurt. In fact, the volume of cash utilized for payments actually increased from $1.4 trillion to $1.5 trillion in that same period. In other words, while the percentage of transactions using cash has decreased, the dollar amount and value of the transactions have increased in total.

Furthermore, the global ATM market is still growing at a rate of 5% per year. Last quarter, Cardtronics’ UK ATM revenues grew by 27%, and with additional banks shutting down branches in light of the Brexit, this trend will likely continue in Britain. As the firm continues to shift its focus towards Europe and other regions where ATM presence is growing, revenues should remain strong for years to come.

Global ATM Count Is Projected To Grow At 5% CAGR
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Currently, Cardtronics is in the process of developing more sophisticated devices. These kiosks would be a “one stop shop” for financial services, allowing clients to not only withdraw cash, but also perform more complex financial transactions such as bill payment and money transfers. Even though cash might become obsolete at some point in the future, the need for these transactions will remain.

At the end of the day, if anything can settle fears of ATMs disappearing tomorrow morning, it would be Cardtronics’ solid financial statements. 

Cardtronics Has Been Experiencing Consistent Revenue And EPS Growth

Operating cash flows have been growing at a CAGR of 20% and adjusted EPS has grown by an astounding 32% in the last year. With strong cash flows and a healthy gross margin at 35%, outlook is bright in the coming months for Cardtronics.

Risks To Consider: Redomiciling the company exposes Cardtronics to currency fluctuations especially with respect to the British pound to U.S. dollar conversion. If the pound were to drastically appreciate against the dollar in the near future, the book value of the firm’s revenues would be lower. However, with large amounts of uncertainty remaining in the wake of the Brexit, a sudden appreciation of the pound is unlikely.

Action To Take: Banking trends indicate that the demand for ATMs will likely remain strong in upcoming months and Cardtronics has promising geographic and product expansion possibilities. Go long on CATM at the current price of $39.20. 

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