Yahoo Finance consensus earnings estimates gives it $1.90/share for fiscal 2011 (which ended in October), and, $2.48/share for 2012. This gives us a P/E Ratio of 18 for 2011, and, 14 going forward. With earnings growth projected to be 30% next year, and, its compound annual growth rate at 23.5% for the next five, you get a reasonably priced, or even undervalued security. As a long-term investment, earnings may be lumpy over the next few years, but my guess is that it could be a bargain at its current price which is very close to a 52 week low.
Although they utilize proprietary software in their point-of-purchase readers, VeriFone is primarily a hardware company. I am not suggesting they are in the same league as Apple (AAPL) because Apple is in a league of its own, but they may be suffering the same fate in regards to a compressed P/E Ratio. Both are leading edge technology companies, but not software pure plays which get the expanded valuations. This is something to consider if you are tempted to buy it at its current depressed price.
If you are not familiar with VeriFone Systems, you probably use their terminals every day if you swipe your credit card at the supermarket, gas station, fast food restaurant, or, even in a taxi. Although they are growing internationally, most of VeriFone's projected revenue is derived from merchants upgrading their their point-of-purchase readers. The newest upgrade cycle may not take off if smartphones equipped with Near Field Communications capabilities do not ramp up in a timely fashion.
In the last three conference calls, CEO Douglas Bergeron discusses the evolution of his initiatives in the upgrade cycle of Near Field Communications.
- In the June 2nd, Q2 Conference Call: "We recently announced that we are partnering with Google (GOOG) and top retailers to deploy a new NFC-based mobile payment system for trial use throughout the U.S. The trials are occurring at major retailers including American Eagle Outfitters (AEO), Foot Locker (FL), Macy's (M) and Toys "R" Us. Google and retailers are using VeriFone's Near Field Communication-enabled point-of-sale systems to power more engaging consumer-friendly transactions. Our retail presence, security infrastructure and brand recognition is key to the success of the NFC offering. If these trials lead to wide-scale deployment across the industry, we expect a boost to our growth for the next several years by $100 million to $150 million per year in the U.S. and even more internationally.".
- In the September 6th, Q3 Conference Call, his enthusiasm continues: "Visa's (V) recently announced plan to accelerate the migration to EMV contact and contactless chip technology in the U.S., combined with the industry's interest in deploying NFC technologies, creates a unique situation that may stimulate and accelerate terminal upgrade cycles. It's too early to predict what other card networks will do. But directionally, this could mean a complete product refresh over the next several years, representing hundreds of millions of dollars of business.".
- In the most recent Q4 Conference Call, Bergeron updates us on his expanding network of providers: "We continue to make great progress on our strategic relationships. Google, is now live in approximately 40,000 VeriFone lanes across the country. VeriFone has upgraded each of these lanes, with NFC functionality and sold the VeriFone Google application and interfaces at each live location. VeriFone has proven invaluable in the Google Wallet initiative, delivering 12 of the 13 of the SingleTap merchants listed on the Google Wallet website...We also continue to work very closely with AT&T (T), T-Mobile and Verizon's (VZ) payment joint venture called Isis, to support their 2012 pilot plans, as well as scaling to support their national rollout. In addition, PayPal is going extremely well, as we are actively engaging merchants and collaborating with PayPal in how we can support their 2012 objectives.".
I believe that this technology will not become universally accepted for another year or two because it is dependent on merchants upgrading their systems, not the introduction of the technology to the consumer. In a world of immediate gratification, traders tend to gravitate towards securities that are on a hot streak. This is not the case for VeriFone, and, I don't see it bouncing back until this new initiative becomes commonplace. The company may very well trade in lock-step with the overall market until it's ready for another close-up.
This stock is not a long shot. Far from it. VeriFone is numero uno globally in their niche. My take is that with handicapping equities in the Vegas-style casino we call the stock market, you have to take catalysts into consideration because we are being ruled by high-frequency trading. If you have a short-term mindset, this is not the stock to be in. If you have a penchant for value, this stock would be a nice addition to your portfolio.