VeriFone Systems (PAY),  a leading global provider of technology for electronic payment transactions and value-added services at the point-of-sale, will release its financial results for the third quarter of fiscal 2013 after the market closes on Sept.5, 2013.

VeriFone’s stock has continued to fall in light of new challenges facing the payment processor. With revenue expected to decline sharply again this quarter, VeriFone earnings should continue to drop compared to year-ago levels, raising questions about the company’s future strategic direction.

Wall Street expects VeriFone to earn 20 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies a drop of 73.3% from last year when it earned 75 cents a share while the company also sees non-GAAP earnings of around 20 cents a share for the May to July period.

Despite the fact that VeriFone made some big steps forward toward getting back into the payment-processing game in the past month – creating a partnership with Groupon (GRPN) and also trying to develop new business in other areas, such as the French passenger railroad and New York taxi cabs – the damage from the prior earnings report, combined with a list of other factors, is an impossible barrier to overcome at this stage – “too little too late” — and will make the expected earnings report look very ugly.

Let’s look at these factors working against VeriFone:-

1. Partnership with Groupon

The partnership with Groupon is yet another attempt to avoid disintermediation, as it tries to convince eBay‘s (EBAY) PayPal and other big players that having their payment services accepted not just online but in physical stores as well unlocks greater value.

2. Past Earnings Debacle

The fiscal second-quarter earnings in early June has been the major cause of VeriFone’s problems. Even though VeriFone has been working hard to try to turn around its business, earnings and revenue came in well short of expectations. Even worse, the company gave guidance that forced investors to downgrade their future views on earnings and revenue, with calls for $400 million in sales coming in about 13% below previous expectations and earnings guidance less than half of what shareholders expected to see.

3. Expected Earnings Point Downwards

Even though VeriFone’s quarterly earnings have managed to top the Street view twice in the past four quarters, this is not likely to be forthcoming this quarter, as over the past 90 days, the consensus estimates have declined from 50 cents a share.

Also, quarterly revenues are also estimated to fall 18.7 percent to $400.83 million from $493.22 million in the same quarter last year. The company’s revenue growth has sequentially declined for the past four quarters. VeriFone expects third quarter revenue of about $400 million.

As well, distributor loss in EMEA due to Office of Foreign Assets Control (OFAC) issues could continue to weigh on growth. In addition, weakness in the Petroleum business in the US due to deal slippage could weigh on the US revenue growth.

4.

Analysts Views are Gloomy

In recent months, analysts have dramatically marked down their views on VeriFone earnings, slashing July quarter estimates by 60% and cutting full-fiscal year projections for both this year and next by about a third.

On Thursday, August 22 the following analysts downgraded VeriFone:-

• Wedbush cut their price target from $33.00 to $22.00 and now have a “neutral” rating on the stock.
• UBS AG cut their price from $39.00 to $26.00 and now have a “buy” rating on the stock.
• Finally, SunTrust downgraded shares of VeriFone from a “buy” rating to a “neutral” rating.

5. Hedge Funds Dissatisfaction

Many of the hedge funds have been slashing their positions in VeriFone — Paul Singer’s Elliott Management cut the largest stake of all the hedgies, totaling an estimated $60.1 million in stock. SAC Subsidiary’s fund, Signal Capital Management, also sold off its stock, about $15.7 million worth.

6. A Rise in Competition

A huge rise in competition has threatened the company’s traditional strength in the industry. VeriFone is facing market share loss in Canada, Europe, and Latin America due to product certification issues that could take time to resolve.

So far, VeriFone’s response to the competitive threat hasn’t been sufficient to give investors confidence that the company will remain an industry leader.

Recommendation

VeriFone’s competencies don’t translate into the payment services market and could potentially create channel conflict. There is a great deal of skepticism surrounding VeriFone’s ability to achieve any sustainable growth despite the fact that VeriFone shares have increased in value in the past week.

However, overall, the shares of VeriFone has fallen 16% since late May, and 43% in the last year, but with this recent push upwards of stock price making this options put trade even more profitable with an expected return of 50%.

OPTIONS TRADE: Buy the PAY Jan 2014 20.000 put (PAY140118P00020000) at or under $2.50, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $3.75.

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