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VeriFone Systems: Your Cash Ain't Nothing But Trash

Apr. 19, 2011 5:22 PM ETPAY-OLD
Ted Stamas profile picture
Ted Stamas's Blog
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It seems like I see VeriFone Systems (PAY) products every time I use my credit card. Swipe your card at the gas pump, grocery store, restaurants (both casual dining and fast food), retail stores and even in taxis, you are probably using a VeriFone Systems point-of-purchase reader. Since its inception in 1981, the company has, "...designed and marketed system solutions that facilitate the long-term shift toward electronic payment transactions and away from cash and checks.", so says the 10-K. When you hear the expression 'your cash is no good here', VeriFone really means it. It's been a mission of the company to get the genral public to use only plasitc, either debit or credit cards, and has been very successful in their endeavor.

Their stock has experienced a caffeinated run since the early part of May 2010 when it was selling for $15.50. It's currently trading in the mid $50's after a series of blowout quarters. There is also the anticipation of their intermediary position between consumers and financial cartels with Near Field Communications (NFC) capabilities on smartphones, and, the profits they may reap as retailers upgrade their sytems. NFC is the nascent technology that allows you to make credit card payments with your handheld mobile device among other things. Just wave your cellphone near a point-of-purchase terminal and voila, your transaction is complete. No cash, no credit cards.

NFC has been center stage of late with the introduction of Isis, a joint venture of AT&T (T), T-Mobile and Verizon (VZ) that is developing the technology to not only accept payments via smartphones, but to also include value-added services like advertising and coupons. VeriFone CEO Douglas Bergeron articulated during the last conference call: "The Isis joint venture alone represents a market reach covering 76% of U.S. mobile phone subscribers and a distribution network of over 20,000 retail stores across America. When you add the Google (GOOG), Apple (AAPL) and PayPal brands and their prospective global reach, it becomes quite clear we are at a tipping point where mobile payments can begin to pay for goods and services.".

Last month The Wall Street Journal reported that Google, MasterCard (MA) and CitiGroup (C) were teaming up to embed NFC technology in Android devices, and, use VeriFone readers to process the payments in a pilot program. Neither Google or VeriFone will reap the rewards of transaction fees, but they will be able collect data from handset users and transmit the above mentioned advertisements and coupons to end users. CEO Bergeron declined to comment on VeriFone's relationship with Google in that same article, but in 4/12/11 Reuters post said: "The more complexity that moves to the point-of-sale, the better for us. A system that adds NFC capabilities is obviously higher margin than something that just swipes a credit card.".

Bergeron also stated that: "The typical refresh cycle for payment terminals is 3-4 years and if NFC succeeds, VeriFone would have the opportunity to speed up that cycle.". This compounds the dynamic that 40%-45% of all credit card transactions domestically are still performed by integrated cash register solutions. There is plenty of market share for VeriFone to grab as the world adapts to the 21st Century - in the America and overseas.

VeriFone Systems currently ranks: "... number 2 in the global market for payment systems. But it should take over the top spot when it closes its $485 million buyout of Hypercom, a maker of point-of-sale equipment...", as reported in a recent Investor's Business Daily article. This relationship between VeriFone and Hypercom is no shotgun wedding. In fact, in the two weeks since the article was published, Hypercom did their version of a prenup and sold its U.S. payment systems business to Ingenico S.A. (ING.PA) in order to clear the path for the merger to be approved. It is slated to close in the second half of 2011.

If you believe that the added muscle and reach of Hypercom, and the evolution of NFC technology may boost the top and bottom lines for VeriFone Systems, you may be right, but not immediately. The potential merger could put pressure on the stock as the two companies amalgamate their resources. Although The Yankee Group predicts the value of NFC-based transactions is likely to increase from $27 million in 2010 to $40 billion in 2014, there is no guarantee that retailers will adopt the technology as fast as The Yankee Group is forecasting unless service providers win over the merchants.

In the 3/1/11 conference call, CEO Bergeron addressed the issue: "These merchants won't willingly migrate to alternative payment schemes and value-added services unless they are seemingly compliant with traditional ways to pay at point-of-sale and don't add to the complexity and expense of payment acceptance. Service providers have continually tried to force feed new payment and security requirements on merchants, who have been telling us that frankly, they've had enough.".

On a valuation level VeriFone Systems is reasonably priced at $52/share. Its consensus earnings estimate for 2011 as reported on Yahoo Finance is $1.81, which gives it a P/E Ratio of 28. Going forward one year, earnings estimates are $2.17, which gives at a P/E of 24 and a growth rate of about 25%. So the PEG Ratio (price/earnings/growth) is roughly one - right about where you want it if you are considering this stock for your portfolio.

It should be noted that VeriFone Sytems has basically operated at a loss for most of their duration, although 2010 and 2011 were very profitable. One tidbit I dug up in the conference call courtesy of Mr. Bergeron concerned the lumpy growth the company has experienced in the past. When buttonholed by an analyst about the tough comps the company will surely experience going forward (they grew 43% over last year), Bergeron responded: "No, I don't think we'll see 43% year-over-year growth. But double digits, I think, a fairly low hurdle, and I'm pretty confident that that's in the cards for the foreseeable future.".

If you do own the stock, or, are thinking of buying it, be aware that it may be a roller coaster ride if you are a long-term investor. When looking at VeriFone Systems, you should also take into consideration it's primarily a hardware stock with a P/E Ratio of 28. Contrast that with Apple and their P/E Ratio of 15. They both have approximately the same growth rates.

Investors should also know that they were rocked by an accounting scandal in 2007-2008 and had to restate earnings which crushed the stock. This may change the complexion of your thinking, but it's what lies ahead that is important for them. Bergeron has been CEO since 2001, and, seems to have righted the ship after the CFO and General Counsel were let go in the aftermath of the bookkeeping chicanery.

There is a legitimate debate as to where the market is heading, if anywhere. I heard Ken Fisher on CNBC on Tuesday and he believes we are going to flatline this year. Then you get soothsayers like Harry Dent who are extremely bearish on the second half of the year, and conversely, the bulls like Jim Paulsen of Wells Capital Management who see no end in sight for the current run. Which direction this market goes will have a large impact on VeriFone systems because of their Beta of 1.98. If the market keeps rising, this equity will continue to outperform the S&P 500. However, if the market contracts, look out below. This stock could drop considerably.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Am short the market with inverse ETFs.

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