An Insider Is Betting on This Electronic Payments Stock

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On July 10, a family trust connected to VeriFone Systems (NYSE: PAY) Board member Jeffrey Stiefler purchased 27,900 shares of stock at an average price of $17.89 per share. Insider purchases are often treated as bullish signals, as the insider would be reluctant to buy more shares and increase their company-specific risk unless they had a good deal of confidence in the company (according to economic theories of rational diversification).

Our database of insider filings shows that two other VeriFone insiders were buying the stock during the month of June; studies show that stocks bought by multiple insiders are particularly likely -- though, of course, not certain -- to outperform the market. Read our analysis of studies on consensus insider purchases.

A closer look at the company

VeriFone produces electronic payment systems used by retailers at point of sale (for example, devices that consumers use to swipe their credit card to pay for their purchases). The stock price dived in February after disclosing preliminary first-quarter results far below analyst expectations and issuing disappointing guidance numbers, and is still down 41% year to date.

Revenue for the second quarter of VeriFone’s fiscal year (the quarter ending in April) ended up being down 10% versus a year earlier, and even if we add back a litigation loss contingency, the company’s operating income was essentially zero. Conditions were a bit better during Q1, but because of interest expenses, VeriFone still turned in only a small pre-tax profit for the first six months of this fiscal year.

Cash flow from operations has been up, but only because of reductions in working capital. Wall Street analysts expect the business to somewhat improve next year, projecting $1.51 in earnings per share for a forward P/E of 12.

In addition to following insider activity, we also track quarterly 13F filings from hundreds of hedge funds and other notable investors. We’ve found that this information can be useful in developing investment strategies; for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy).

We can see from our database that billionaire Ken Griffin’s Citadel Investment Group reported a position of 1.2 million shares as of the end of March (check out Griffin's stock picks).

Comparing VeriFone to its peers

The closest peer for VeriFone is NCR (NYSE: NCR), whose products include point of sale terminals (the company was formerly known as National Cash Register) which are complementary to VeriFone’s own payment systems. While NCR’s net income has been at a fairly low level on a trailing basis, the company experienced 22% earnings growth in its last quarterly report compared to the first quarter of 2012, supported by 13% revenue growth. The stock trades at 11 times forward earnings estimates as the sell-side expects these improvements to continue next year.

We can also compare VeriFone to eBay (NASDAQ: EBAY), whose PayPal business unit is one of the many players trying to revolutionize mobile payments in a way that some have seen as a threat to VeriFone’s business. eBay has also been seeing double-digit growth rates on both top and bottom lines. While the trailing and forward P/Es of 28 and 18, respectively, suggest that the market has already accounted for a good deal of future earnings growth, it might be worth looking into as a potential “growth at a reasonable price” stock.

Conclusion

On a forward earnings basis, VeriFone does look appealing, and of course we have multiple insiders buying the stock. However, we don’t feel comfortable in speculating that business conditions will improve this much -- revenue has been down considerably, and the company does not seem to have been cutting costs enough to tread water on the profitability front. As a result, we would at least want to wait for more financials from the company and would likely not be recommending it in value terms even then.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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