$PAY: Barron's(12/31) Beaten-Down VeriFone Could Climb 35%

Barron's(12/31) Beaten-Down VeriFone Could Climb 35%
Dec 29 at 00:08
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By Alexander Eule

 Change is usually accompanied by anxiety. with the emergence of the
digital wallet, investors are taking it out on VeriFone Systems, the dominant
maker of payment-card terminals found on retail counters. Among the top 1,000
U.S. retailers, VeriFone has 70% of the terminals. Investors are worried the
business could evaporate as merchants use smartphones and tablets to accept card
payments.
      Always a volatile stock, VeriFone has had its shares cut in half since
April, to a recent $28.70. Investors are now valuing the stock at just nine
times fiscal 2013 earnings, versus a 10-year average of 18. VeriFone's fiscal
year ends in October.

      The reality is not so dire. The end of cash and the growth of the digital
wallet creates uncertainty for VeriFone, yes, but there's plenty of opportunity,
as well. The company is enabling card payments in taxis, for instance, a cash-
only business until recently. "Folks are running for the exits on this stock,
even though they should probably do the opposite," says John T. Williams, a UBS
analyst, who upgraded VeriFone shares to Buy in December.
      Square, the San Francisco start-up, is at the forefront of the fears. The
company gives retailers "dongles," or miniature card readers, which attach to
smartphones and tablets. In September, Square said it was processing $8
billion in payments annually. Most of Square's merchants are small and new to
electronic payments. Eventually, these merchants will need more-sophisticated
equipment. That's where VeriFone enters the picture. "In many ways, you could
argue that Square is enabling future VeriFone customers by bringing these
micro-merchants into the world of card acceptance," Williams says.
      VeriFone will also benefit as merchants upgrade their systems to comply
with new security protocols. Europe and Canada have already upgraded to the
"chip and pin," or EMV, standard, and their payment systems are much more
secure.
      In the U.S., the upgrades are taking awhile to play out, as they did in
Europe. "Everyone delayed it until they had to," says Mark Kopinksi, American
Century's chief investment officer for global and non-U.S. equity, who has
closely tracked the digital wallet and evolving payment systems. "You didn't get
a big push into EMV until the deadline." In the U.S., the deadline is now fast
approaching, and MasterCard and Visa are making rule changes that will
effectively require merchants to employ the standard by late 2015.
      Williams thinks that security upgrades could drive an additional $50
million to $60 million in revenue for VeriFone in each of the next five years.
He sees overall revenue growing 10% in fiscal 2013, to $2.1 billion. Analysts
expect VeriFone earnings to grow 19% this year, to $360 million, or $3.27 a
share. The stock deserves a P/E of at least 12, which would put shares at $39.



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