This Beaten Down Stock Deserves To Be on Your Radar

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It was something that I knew was coming, and that’s why I had already provided readers with a heads up about the potential opportunity that was about to surface. Electronic payments and solutions company VeriFone Systems (NYSE: PAY) had to endure another black day last week after the company posted mixed quarterly results and its outlook spooked investors.

However, VeriFone is a company for the future as it is slated to benefit from growth in digital payments. Hence, it makes sense to take a close look at it, especially considering the fact that it’s delivering good revenue growth, is trading close to its 52-week low, and is expected to grow at a fast clip.

In its previous quarter, VeriFone’s top line, once again, witnessed an impressive growth of 18% with improvements seen across geographies and various customers. For instance, VeriFone’s multilane retail sales business is growing really fast, driven by wins at retailers such as Target, Kroger and others, leading to a year-over-year growth of 50%.

A Strong Clientele

The company already has well-known names such as BP, Marathon, Cisco and Sonoco on its client list and is running a pilot project for installing its solutions at Valero’s gas stations in Austin. This can turn into a huge opportunity if the pilot is completed successfully, giving VeriFone 3500 gas stations to implement its solutions.

One can count on VeriFone to convert this pilot into a full-fledged project on the basis of its previous wins for the VeriFone Digital Network (VNET). It already counts Robinson Oil as a VNET customer and is running pilots at Kroger, Sonoco, Hess, Ricker's and Motomart. VeriFone’s solution has been delivering the goods, as witnessed during the pilots, increasing sales in convenience stores in gas stations by 4% to 7%. Hence, it won’t be surprising if the company lands all of the deals since they would yield higher revenue for its customers.

VeriFone continued its impressive growth in transportation systems by penning a 10-year deal with Frias Transportation Management, which happens to be the biggest taxi, limo and shuttle provider in Vegas for displaying ads. Apart from this, VeriFone is also foraying into the e-hailing market, getting a pilot project approved by the New York City Taxi and Limousine Commission for hailing taxis automatically.

Growing Across the World

These were among the many positives that VeriFone dished out in its previous quarterly report. In addition, VeriFone is also witnessing an upswing in its international business. Its Latin American business had suffered in the third-quarter due to a fire in Brazil, but it is now getting back on its feet sooner than expected. North America, Asia and EMEA showed strong growth in the quarter.

VeriFone has been finding great growth in China. Its revenue in the region jumped 70% in the previous quarter on the back of impressive customer wins. Going forward, VeriFone is looking to develop newer solutions. The company has also moved out of its low-margin, small merchant payments business to improve profitability.

Strong Partnerships

VeriFone states that its investments in new and better services should start bearing fruit from the second half of next year. Most importantly, as I had mentioned in my previous article on VeriFone, the company supports almost all of the major players in the mobile payments industry, ranging from eBay’s (NASDAQ: EBAY) PayPal to Google, Groupon and others.

VeriFone had inked a deal with PayPal earlier this year which took PayPal’s presence to another level, opening up access to more than a million high volume points of sale. It is on the back of partnerships like these with PayPal and others that VeriFone is well-positioned to ride the eventual growth in digital and mobile payments.

But this isn’t the end. Starbucks’ (NASDAQ: SBUX) partnership with Square regarding mobile payments had proved to be a sore for VeriFone. The coffee purveyor had teamed up with Square for handling debit and credit card transactions a few months back, sending VeriFone’s stock downhill. However, VeriFone fought back by winning a customer in the form of McDonald's, apart from Dunkin’ Brands’ Dunkin Donuts, for developing their mobile payment systems.

The Takeaway

Despite delivering solid revenue and earnings growth this year, VeriFone’s stock price has declined almost 20%. The stock is trading close to its 52-week low due to mixed earnings and tepid outlook that it has issued a few times in 2012. The fire in Brazil might have constrained VeriFone’s top line for the past two quarters, but its long-term prospects still look good.

Higher R&D costs along with subdued spending in many of its key markets have led the company to guide lower than the Street for the ongoing quarter, but the company’s impressive array of customers, its presence across geographies, and investments in research and development shouldn’t be ignored. Considering all these factors, and also taking into account the fact that VeriFone trades at a forward P/E of just 8.11 along with a hugely impressive PEG ratio of 0.32, it would make sense to take a look at this Switzerland of Payments.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of VeriFone Holdings and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend eBay and Starbucks. 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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