Don't Buy This Turnaround Just Yet

Don't Buy This Turnaround Just Yet

It isn't going to be a happy New Year for VeriFone Holdings . The electronic-payment-solutions provider has had a forgettable 2013, and 2014 might be no different. VeriFone had given investors a glimmer of hope in September when it reported its third-quarter results, but it looks like there is no turnaround in sight after all. Competition from rivals such as Ingenico and the threat of disruptive innovation from tech companies such as eBay will make matters worse for VeriFone, which had dramatically lost track of its business in February.

Worrying signs
VeriFone's business is shrinking -- revenue was down 11% year over year in the previous quarter while adjusted profit per share crashed from $0.76 per share last year to $0.27 per share. Gross margin was also down to 38% from 41.1%.

A worrisome outlook completed VeriFone's awful quarterly report. The company expects revenue of between $425 million and $430 million, slightly below the $428 million consensus at the mid-point. Earnings are expected to come in at $0.26 per share, way off the $0.32 per share consensus estimate. For a company claiming to be among the top-two positions in almost all of the markets it serves and processing around 40% of the global consumer-initiated physical card-based transactions, these results are baffling.

Gunning for a turnaround...
VeriFone has a new CEO in place and is looking to execute a turnaround. The company sounded out a number of "exciting" developments during the previous conference call, including a partnership with American Express that enables New York taxi passengers to use their American Express card membership-reward points in place of cash to pay taxi fares. The program has been rolled out to 7,000 cabs in New York and VeriFone is quite optimistic about the potential going forward.

This is a good development for both American Express and VeriFone. American Express has brought a groundbreaking feature for its cardholders through this move. Earlier, AmEx cardholders could only use reward points to make online purchases, but now they can spend in the physical world as well. This is where VeriFone's presence across various establishments would come into play and help AmEx attract more customers. Encouraged by this move, VeriFone is now looking to take this program international.

VeriFone also seems to be getting more business from different companies around the world. In the U.S., Sephora, American Girl, VF Corp, and Under Armour have adopted VeriFone's mobile solutions. The company is looking to push its full suite of services, including mobile and digital marketing, apart from its payment terminals.

In Canada, VeriFone has penned an agreement with Moneris, the country's largest payment-services provider. Moneris will deploy VeriFone's payment devices from 2014 and this could be another growth driver for the company going forward. VeriFone has also entered into a partnership with China PnR, the Middle Kingdom's third-largest payments processor. Finally, VeriFone spoke about a couple of customer wins in France and Egypt as well.

VeriFone is also focused on pushing its products harder going forward, apart from focusing on research and development to improve its technological capabilities. In the previous quarter, VeriFone's R&D expenses were up 13.4% from last year while sales and marketing expenses also increased close to 16% in its quest to get more business.

...but still not a buy
While these developments are positive, they don't make VeriFone a buy. VeriFone's full-year outlook for fiscal 2014 was not up to the mark. The company expects earnings of between $1.35 per and $1.40 per share and revenue in the range of $1.77 billion to $1.8 billion. In comparison, analysts were expecting a much higher earnings figure of $1.59 per share. So, it looks as though VeriFone will have trouble growing its earnings as it looks to regain its footing.

The analyst estimate for annual earnings growth over the next five years is just 3%, which is why until and unless VeriFone converts its contract wins into profit growth, it isn't a buy. Then there's the threat of competition from the likes of Square, eBay, etc. eBay is looking to push its payments solutions rapidly and released PayPal Beacon earlier this year. The PayPal Beacon Bluetooth device allows consumers to pay for their purchases completely hands-free through a smartphone app.

Also, eBay has been aggressively expanding PayPal Here, which is a small card reader that attaches to mobile devices, allowing sellers to accept payments through customers' PayPal app. This shows how eBay is pushing the envelope in digital payments and could even eliminate the need for a point-of-sales system because of its global reach and innovation.

The bottom line
VeriFone management might be sounding optimistic and citing its design wins, but the bottom line is that the stock isn't a buy. Until and unless VeriFone shows concrete signs of a turnaround and starts growing again, investors should stay away.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends American Express and eBay. The Motley Fool owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published