VeriFone Holdings Inc. (PAY) Analysis
We started noticing Verifone (PAY) a few years ago when paying via ATM became more popular than cash. For those that are not familiar with Verifone, this company provides the machines and encryption technology that merchant use we can pay via credit card or ATM. The next time you visit the grocery store, look at the name of the machine as you swipe your card. You’ll notice it is from Verifone.
Aside from NCR, there is very little competition in this area. Verifone appears to be winning as merchants are consistently choosing Verifone over NCR. As evidenced by the company’s stock performance, this is a classic example of growth stock. Moreover, Verifone appears to have the market cornered and is growing at an impressive rate. In the third quarter of ’06, Verifone reported a 79% year over year increase in net income. This blew away Wall St. estimate which propel the stock to its current level. Trading with a P/E of 42, Verifone is certainly not cheap. Like most growth stocks, it typically trade at a very high multiple. PAY closed at $36.26 on Friday, January 12, 2007.
In keeping with our principle of going after companies that holds a virtual monopoly with simple business model, the question here is when to buy this stock, not if. Verifone’s business will only grow as we move closer to becoming a cashless society. For this reason alone, Verifone is in a great position to capitalize on the opportunities ahead
Although we would love to own this stock, the fact it is trading close to its 52 week high is concerning. Experience has taught us buying at this level does not represent the opportunity for optimal rate of return. While we cannot predict the future, we believe the stock market is due for a small correction in the coming weeks as interest rate takes center stage again. It is our hope the volatility will provide the opportunity to buy PAY at a slight discount. Our recommendation would be to try and acquire PAY in the low 30s. Exercising patience will be a key factor. If you can get it at $31 or $32, this will reduce your risk drastically. If all goes well and the business of online transaction continues to grow as expected, we see PAY in the mid 40s by December 2007.
