PAY Should Pay Off in 2012 - Analyst Blog

We recently upgraded our recommendation on VeriFone Systems ( PAY ) to Outperform from Neutral.

The recent acquisitions of Hypercom and Point strengthen the company's foothold in Europe along with driving significant synergies.

Last week, VeriFone completed the acquisition of Point, which provides payment and gateway services and solutions for retailers in Northern Europe. VeriFone intends to extend the Point platform throughout the region and beyond, with the aim of creating the world's largest infrastructure for rapid deployment of alternative payments.

With the addition of Point, management expects services revenue will now exceed 30% of total revenue by the second quarter of 2012. Management aims to create a services-based solutions business, with 50% services revenue by the end of fiscal 2015. We view this acquisition as positive for the company as it expands the product portfolio along with accelerating the mix of revenues towards higher margin services revenues.

Growth rates for electronic payment solution systems have been higher in international markets, primarily due to the relatively low penetration rates of electronic payment transactions in many regions, such as Eastern Europe, Latin America and Asia.

Consequently, in order to establish a footprint in key growing markets, VeriFone continues to make strategic acquisitions. The company acquired rival Hypercom Corporation in 2010 which had established itself in a number of important European markets.

The acquisition of Hypercom should strengthen VeriFone's foothold in Continental Europe, where its market penetration has been lower compared with the rest of the world along with providing an edge against key competitor France-based Ingenico.

The acquisition would also bring significant operating synergies that will emanate from eliminating product overlap, administrative costs and sales expenses in many markets. VeriFone has successfully integrated sales and marketing operations of Hypercom and the acquisition was modestly accretive in the fourth quarter of fiscal 2012 and is expected to add $0.20 to $0.25 to the bottom-line in 2012.

Margins are also expected to get a boost with a greater mix of services revenues in the coming quarters.

Earnings estimates for fiscal 2012 have moved up significantly of late. Consequently, we upgrade our recommendation to Outperform from Neutral. We continue to be positive on the company's performance in the coming quarters and believe the current share price represents an attractive entry point.

Our recommendation is supported by Zacks #1 Rank, which translates into a short-term rating of Strong Buy.

VERIFONE HLDGS ( PAY ): Free Stock Analysis Report

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

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

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