VeriFone Systems, Inc. (PAY), based in San Jose, California, designs, markets and services a transaction automation system that facilitates electronic payments between consumers, merchants and financial institutions. VeriFone reported earnings yesterday (Wednesday) after the close. Shortly after the earnings report, Doug Bergeron, the company’s CEO; Doug Reed, the Treasurer and V.P. of Investor Relations; and the company’s CFO Bob Dykes held a conference call (see complete transcript here).
VeriFone beat the earnings per share estimate and met revenue guidance, not something done a lot lately. The problem is VeriFone did commit one of the greatest Wall St. sins: The forward guidance provided by the company is not as splendid as Wall St. was looking for, sending shares down sharply. The really interesting thing is that the shares didn’t fall in price right away. In after-hours trading Wednesday, VeriFone bounced around the day’s closing price both higher and lower -- not a strong sign of weakness overall. In fact, VeriFone opened up today above $41 per share before selling off for the rest of the day. Clearly some investors liked what VeriFone reported and even after the initial digestion of information, put in buy orders for the opening today.
So what happened between the earnings report, the conference call, the opening trade today, and the rest of the day today to send the stock down so sharply? Let’s go over the earnings report, and conference call, to see if we can find what changed the opinion so sharply today.
For fourth quarter fiscal 2011, VeriFone reported revenue of $410.7 million (up almost 50% year-over-year) and up almost 30% from the previous quarter. Even so, North American sales were actually down year-over-year about 5%. Given the large increase in sales, I believe the slight fall in North America is totally discounted in light of the economy. Of course if North America isn’t producing, International is with an increase of 95% year-over-year. Brazil reported the strongest of Latin America, and Latin America set a new sales record.
Gross margins were mixed, with the most recent reporting quarter dropping slightly to 40% from last quarter’s 43%. At the same time, fiscal year 2011 beat 2010 with 42% compared to 39%. Basically, all the numbers are respectable and as I dug deeper I didn’t see any flashing lights of warning.
Guidance is the tough spot and while VeriFone is trading at a lofty trailing PE multiple of 25, the forward PE multiple is about 13. If I use the now trading price of about $37.30 and use the lower end of the fiscal year 2012 guidance of $2.53 net income per diluted share I still come up with a forward guidance of only 14.7.
For a company with consistent top and bottom line growth, a multiple of less than 15 is appears to be really cheap. Not only is 14.7 cheap for a company like VeriFone near term, but longer term it even becomes more of a value buy, considering the next quarter and next year will incur investment costs with the “Point” acquisition which is expected to close very soon.
By the end of today’s trading VeriFone traded down over 9% to settle at $36.80 near the low of the day. Unfortunately from my experience, when a stock gets crushed this much after earnings, it can take a day or two before the bleeding stops. As a result, I expect VeriFone to more likely than not trade lower again Friday. If VeriFone trades lower and falls into the sub $35 range I will look to open up a position. I will be watching the January $35 strike put options to short for about $2 each. If exercised, I will have a cost basis of about $33 per share. This gives me a forward PE multiple of about 10. I consider buying VeriFone or most any other growth stock for a multiple of 10 a very good value buy. If I am able to sell the put options and they do not get exercised due to the price staying above $35 during option expiration day, I will have a very respectable return of over 5.5%. Another way to gain exposure to VeriFone is a buy-write. Buy the stock and write a call January $35 call which should pay off slightly better due to the increase in premium and possibly from added liquidity of trading a call option (although puts tend to trade equal or higher volumes than call options when a stock is falling quickly).
I use a proprietary blend of technical analysis, financial crowd behavior, and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner. I use Seeking Alpha, Edgar Online, and Yahoo Finance for most of my data. I use the confirmed symbols from earnings.com that I believe to be of the most interest.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PAY over the next 72 hours.
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