VeriFone (NYSE:PAY) once again reported solid quarterly figures last week, with 14% revenue growth at constant FX and 130bps operation margin expansion (to 14.1%) leading to a $0.02 EPS beat ($0.44). North America (+54% revenue growth in Q2 after +31% in Q1) and Europe (8% at constant FX after +4% in Q1) were areas of strength, while Asia was weak (-27%) as VeriFone was affected by order delays and a continued lack of traction in China.
Thanks to this strong Q2 showing, VeriFone slightly raised its FY15 EPS outlook (to $1.81-1.84 from $1.78-1.82, in-line with consensus). But the company failed to impress investors with its Q3 guidance which came a bit short of expectations (revenue of $495-500m and EPS of $0.44-0.46, below a consensus of $501m and $0.46). We wouldn't put too much emphasis on this soft guidance as the company has a history of guiding conservatively and would rather focus on VeriFone's fundamental outlook which has never been brighter.
First, the upgrade cycle of Point-of-Sale terminals in North America is still in its early stages as VeriFone reiterated during its conference call that the U.S. will be only 40% EMV (chip-and-PIN cards) capable in 2015 vs. 24% in 2014. While many investors have been aware of the company's huge 2015 revenue opportunity in relation with EMV, it is now quite clear that the revenue momentum will remain impressive in 2016 and 2017 as many merchants have not yet adopted EMV- enabled devices and will have to make the move soon. As a reminder, merchants using non-EMV compliant devices will assume liability for fraudulent transactions from October this year. In addition, VeriFone CEO commented that none of the 1 million petrol station terminals are EMV capable today and that this should change by 2017.
Second, the Apple (NASDAQ:AAPL) Pay and, more importantly, Android Pay initiatives are another major short-term catalyst. With Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Android commanding a ~80% smartphone market share and stating that seven out of ten Android devices are ready for Pay (they are NFC-enabled), many merchants around the world are likely to upgrade to NFC-enabled terminals over next years.
Third, VeriFone's Asian operations could start gaining some traction soon, notably as the company has hired a former CEO of a major Chinese terminal manufacturer to head its Chinese business.
These various catalysts hint at a double digit revenue growth over 2015-17 for VeriFone. Importantly, this healthy revenue outlook comes with both strong financial discipline (as demonstrated by the significant margin gains in both Q1 and Q2) and some financial leverage (60% gearing), hinting at a 20-30% earnings growth power in coming years.
In our view, this earnings growth potential is not reflected in the stock's valuation multiples (20x 2015, 16x 2016) as they point to a PEG below 1x. We also find totally undeserved Verifone's valuation discount vs. its main rival, Ingenico, which is listed in France. Ingenico currently trades at 25x 2015 and 22x 2016 EPS while it is expected to deliver earnings growth in line or slightly below VeriFone.
We reiterate our Buy rating on the stock.
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