Filed Under:
Tickers in this Article: PAY, GOOG, EBAY, HPY, IBM, DHR, V
Consumers may be more reluctant to open up their wallets at retailers these days, but retailers and service providers are still quite willing to spend their own money on technology to make it easier for consumers to spend. To that end, payment solutions provider VeriFone (NYSE:PAY) is continuing to see excellent growth and momentum, and management is not lacking in confidence about the company's prospects.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Strong Third Quarter
VeriFone has a solid reputation for surpassing analyst estimates and this quarter was no exception. Revenue jumped 21% from last year (8% sequentially), and the company beat the midpoint of analyst estimates by about 6%. Business in the U.S. was weak (on difficult comps), as North American sales fell 1% from last year. Growth was quite strong everywhere else, though - reported results from Europe jumped 56%, while Asia and LatAm grew 42% and 23%.

After the quarter ended, VeriFone completed its acquisition of Hypercom. Hypercom's last 10-Q (ended June 30, 2011) showed revenue of over $119 million and growth of 15% (though down about 13% in the Americas), but investors should remember that divestitures mean that the company will not reap 100% of that former business.

VeriFone did well with profitability. Gross margin did slide about a point on a sequential basis, but was up strongly (four points) from last year. The company recouped some of this through the operating lines, and the company posted adjusted (non-GAAP) operating income growth of 8% on a sequential basis, but 42% on an annual basis.

Confidence, to a Point ...
Management certainly was not shy about putting its results into context - pointing out that Ingenico and Hypercom saw double-digit revenue declines in their North American businesses for the similar time period. Elsewhere throughout the earnings call, management was not shy about discussing the company's accomplishments, its growth prospects, and its strategic positioning with wireless payment partners like Google (Nasdaq:GOOG), AT&T (NYSE:T) and eBay's (Nasdaq:EBAY) PayPal.

That's all well and good - management is certainly doing well. On the other hand, if management believes in this story so strongly, why is the insider ownership relatively low and why haven't company insiders stepped up to buy shares?

A Long, Wide Runway
Even if there's a disconnect between management's bluster and its willingness to back it up from their own wallets, the fact is that there is a lot to like about this story. The company is seeing good growth in its taxi business and retailers and gas stations continue to upgrade their payment terminals - and VeriFone seems to have little to fear right now from Heartland Payment (NYSE:HPY), CyberNet, IBM (NYSE:IBM) or Danaher (NYSE:DHR).

Interestingly, it does not look like the move to mobile payments will be much of a risk. So far, nobody seems to be talking about designing around VeriFone, and as mentioned, the company is working with some sizable players. Is there a risk that companies like MasterCard (NYSE:MA) or Visa (NYSE:V) could team up with Danaher, IBM or NCR (NYSENCR) and develop a platform that challenges or supplants VeriFone? Sure. But right now that does not look like a clear and present danger.

The Bottom Line
I've long lamented the valuation on VeriFone and stood by staying "no thanks" while the stock moved from the high teens to the $50s over the last year and a half. Just because the stock peaked in late March and retested the low $30s recently, that's hardly vindication. Frankly, I was wrong about just how much investors would overlook valuation to own a great secular growth story.

At this point, valuation and financial performance are at a much more attractive intersection, and the stock looks undervalued if the company can deliver more than $2 billion in revenue by the end of 2015. A better free cash flow margin (that is, free cash flow as a percentage of revenue) would be welcome, but this too is an area where the company should be able to improve.

There are two big "ifs" here - the company needs to maintain its revenue growth and improve its free cash flow margin by about three points to be an appealing stock today - but this is a company that growth investors have liked for a while and there is little to fault in the overall growth outlook today. (For additional reading, check out Free Cash Flow Yield: The Best Fundamental Indicator.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center