Outperform on PAY - Analyst Blog

We recently reiterated our Outperform recommendation on VeriFone Holdings Inc. (PAY), which provides solutions for electronic payment systems for the financial, retail, hospitality, petroleum, transportation, government and health care vertical markets.

There is a global trend toward electronic payment transactions and away from cash and checks. This trend has been accelerated by the use of credit and debit card-based payments, especially PIN-based debit. Business has revived robustly for the company after the slowdown in fiscal 2009, especially the point of sale (POS), petroleum and taxi businesses.

New product initiatives such as VeriShield and PayWare Mobile continue to gain traction. Business in North America continues to be driven by PCI upgrades. VeriFone is a leader in providing systems and software solutions that meet these standards and have upgraded or launched next generation systems solutions.

In November 2010, VeriFone announced that it will acquire rival Hypercom Corporation (HYC). Hypercom has established itself in a number of important European markets. Therefore, VeriFone expects the acquisition of Hypercom to enable the company to expand its footprint in Continental Europe, where its market penetration is lower compared with the rest of the world. We view this acquisition as positive.

VeriFone had stated earlier that the acquisition will bring significant operating synergies that will emanate from eliminating product overlap, administrative costs and sales expenses in many markets.

Earnings estimates for fiscal 2011 have increased after the company reported strong results for the fourth quarter and provided a positive guidance for fiscal 2011. VeriFone posted strong performances in the last few quarters, stemming from improved economic conditions that led to a revival in the payment terminal industry.

Management also indicated that the services segment (including warranty and support services and customer specific application development processes) will outpace system solutions as PAY gains traction in value-added encryption, advertising and gateway services, which in turn should boost margins.

We believe the company is well placed, driven by solid demand for newer services. We see a lot of potential for growth in the coming quarters. Therefore, we are maintaining our Outperform recommendation on the stock.  Our recommendation is supported by a Zacks #2 Rank, which translates into a short-term rating of Buy.

 
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