by Dan Burrows | March 12, 2014 12:54 pm
VeriFone (PAY) surged Wednesday on quarterly results showing that although the electronic payments processor is under assault from all sides, the market-share leader still has plenty of life left — as does PAY stock.
The company delivered a better-than-expected Q4 earnings report and full-year outlook this morning, and soon after the bell, PAY stock rose more than 11%. The latest figures indicate VeriFone is making progress in turning its sales around after a terrible 2013.
VeriFone has 60% of the global market share of EMV-enabled payment terminals — EMV stands for Europay, Visa (V) and MasterCard (MA) — and has wide reach on the web with VeriShield protect, among other products and services. But competition has eaten away at its business, while fast-growth mobile payments services have attracted attention from behemoths like Facebook (FB) and Google (GOOG).
VeriFone sales slumped 8.8% in 2013 to $1.7 billion, pushing the company into a full-year loss, and PAY stock has been under pressure accordingly. VeriFone stock started 2013 at about $30 a share and fell 55% in a matter of six months.
But a new management team focused on cost cuts and increased spending on research and development appears to have given VeriFone more than a fighting chance.
That has the market bullish on PAY stock. By the end of last year, VeriFone stock clawed back its losses and has been building on that ever since. Including today’s big rally, PAY is up more than 20% for the year-to-date to hit its highest level in more than a year.
For the most recent quarter, VeriFone exceeded Wall Street estimates on both the top and bottom lines. Earnings per share on an adjusted basis came to 31 cents vs. a forecast of 27 cents, according to a survey by FactSet. Revenue rose almost 2% to $437 million. Analysts’ average estimate was for revenue of $429 million.
More importantly for VeriFone stock, the company’s outlook was better than analysts were modeling. For the current quarter, VeriFone expects EPS of 30 cents to 32 cents on revenue of $440 million to $445 million. The Street was forecasting 31 cents on revenue of $438 million.
PAY stock also got a lift from VeriFone’s buoyant full-year outlook. The company sees earnings coming in at $1.40 a share on revenue of $1.78 billion to $1.81 billion. Analysts, on average, were looking for EPS of $1.39 on $1.79 billion in revenue.
Although most turnarounds don’t turn, the action in VeriFone stock indicates that the market believes this one is working out. The better-than-expected quarter and outlook prompted Deutsche Bank to upgrade PAY stock to “hold” from “sell,” noting that the company appears to be growing sales once again.
Hilliard Lyons, which calls VeriFone stock a “long-term buy,” expects the company to gain momentum through the first half of 2014, and then drive higher growth rates and year-over-year growth, helped by the release of new hardware and timely product certifications.
That said, as much as PAY stock has rallied, VeriFone has a lot of work to do to make its turnaround complete. For the most recent quarter, gross margin contracted, while operating income plunged 43% year-over-year.
Operating expenses rose and will continue to do so this year as VeriFone invests more in R&D and sales and marketing. For PAY stock to retain its hard-won gains, gross margin and operating margin will have to expand, something VeriFone also targets for the second half of 2014.
Profit and revenue are on the mend and VeriFone’s balance sheet is getting healthier, but much of the second-half rebound story looks to be reflected in VeriFone stock. Barring more upgrades, PAY stock has already topped Wall Street’s average and median price targets.
Although this turnaround appears to be turning, you might want to wait for a better entry point after the post-earnings excitement calms down.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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