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VeriFone's path leads to a pot of gold


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Julian Close 09/15/2014

Verifone ( PAY ) has been the dominant player in supplying US businesses with Point of Sale - POS - solutions since the 1980s. Perhaps surprisingly, given this, the company is worth only $4.2 billion, is unprofitable, and was, until recently, in revenue decline. There has been considerable interest in the stock this year, and for a very good reason: nearly every POS system in the US will have to be replaced within the next fifteen months. The question is, can the company produce and sell the new products that the market needs at a comfortable profit margin? And can the company finally grow? The company's track record isn't great, but in this case, the numbers say yes .

More on that in a moment, but first, the reason for the excitement. The United States is the only country in the G-20 that still uses magnetic-stripe credit cards. This makes the U.S. a prime target for hackers who don't want to mess with the more secure systems in places like Russia, Mexico and Argentina. Change is coming though; all US retailers will have to make their POS systems compliant with a standard called EMV by October of 2015, or else they will be subjected to a pretty big penalty in the form of a liability switch .

Once the liability switch goes into effect, retailers, not credit card companies and not banks, will be liable for loss due to fraudulent credit card use. For most retailers, this a drop-dead date; as much as it might cost them to switch to new hardware, it won't be as much as they would have to pay to insure themselves against losses under the new rules. It is widely believed that as retailers upgrade to new EMV readers, they will also add the ability to use Near Field Communication, or NFC technology. Though distinct, the technologies are expected to coexist.

Just this week, two things have happened which appear to push forward the adoption of these technologies. First, Home Depot ( HD ) conceded that it has been hit with a massive security breach, the likes of which did so much damage to Target ( TGT ) earlier this year. Companies are getting tired of sharing their customers' data with every crime syndicate from Russia to Mexico, and even though the companies end up footing the bill, customers are pretty tired of it too. Second, Apple announced that the iPhone 6 would come with NFC technology, allowing customers to use their phones to make payments. Apple has many launch partners lined up, which should be enough to start the ball rolling, after which, other retailers will want their share of the iPhone spending.

Verifone sells the hardware required for both EMV and NFC technologies, and that's a lot of potential sales over the next 15 months. To look at the company's currently negative profit margin, you would think that might not change much, but the new products should have higher profit margins, and analysts do expect a return to profitability later this year. (The average projected EPS of the company for 2014 is $1.48.) That estimate makes the company's forecast year-end P/E Ratio a mere 18.6, not bad for a company with so much upcoming business.

Given the good numbers, along with some recent insider buying, as well as the excitement that should be generated when the iPhone 6 actually hits the street, the chance of any significant near-term drop in the price of PAY stock appears remote.


Chart courtesy of stockcharts.com

I seek to capitalize on this strength with a bull-put credit spread. Look at the January 33/34 bull-put credit spread for at least a $0.25 credit, (though you might be able to get $0.30 if you push for it). You will need to use limit orders to place this trade. This trade has a target return of 33.3% over 124 days, which is an annualized return of 98.1%. Problems begin if PAY stock falls 8.8%. Be aware that this is an aggressive trade and best undertaken by investors with diverse portfolios and high tolerance for risk.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on InvestorsObserver.com



This article appears in: Investing , Options
Referenced Symbols: HD , TGT



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