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VeriFone Is Ready to Pay Investors After Paying for Its Mistakes

Updated to include information in paragraph three.

NEW YORK (TheStreet) -- It wasn't long ago the prevailing question concerning payment technology company VeriFone (PAY - Get Report) was "how much time does it have left?" With shares up 26% for the year to date and 121% from its 52-week low, Wall Street now seems convinced the company isn't going anywhere.

The stock closed Tuesday at $33.96, up 0.27%. The company reports earnings Thursday.

The stock was not a compelling buy ahead of the earnings report because:
1. The shares had already produced strong gains despite the emerging threats of mobile payments.
2. We needed more clarity with the progress of the company's transition from hardware to a software/services platform.
3. VeriFone's operating margin had been under pressure due to rising expenses.

The payments industry is in transition. VeriFone, which has been the market leader for quite a while, has had a tough time embracing some changes -- particularly as the market shifts to mobile payments.

The growing popularity of person-to-person payment platforms from eBay's (EBAY) PayPal has spawned the arrival of (among others) Square and the popular GoPayment system from Intuit (INTU).

To counter the increased competition, last September eBay picked off payment services system Braintree for $800 million, a company that processed well over $12 billion in transactions per year.

Then there's Apple (AAPL), which has long been rumored to be releasing a mobile payment system that functions with the iPhone's biometric TouchID fingerprint sensor. I haven't even mentioned VeriFone's main point-of-sale (POS) rivals NCR (NCR) and Ingenico (INGIY), which have grown despite these threats.

All told, VeriFone's strong bounce from its 52-week low has been impressive. It's no coincidence the company's recovery began when Paul Galant was installed as CEO last September. Galant's experience as head of the Enterprise Payments and Cards unit at Citigroup (C) has paid strong dividends for VeriFone.

In a short period of time, Galant has transformed the company from an antiquated hardware platform to one that is now focused on improving the payment experience by adopting a software/services oriented model.

This is an important move given that eBay has partnered with NCR to integrate PayPal's mobile services, which will enable customers to pay for goods and services using their smartphones. I expect VeriFone to strike similar deals. But before these moves will matter, the company has to figure out a way to reverse its declining revenue.

When it reports Thursday the Street will be looking for 33 cents in earnings per share on revenue of $443.42 million, which represent revenue growth of 3.2% year over year. Although earnings are expected to decline 21% this quarter, this has more to do with the company's ongoing business transition to new platforms, which requires increased capital spending.

The other thing is retail earnings for this quarter haven't been too impressive. VeriFone collects fees on a per-transaction basis. Inclement weather causing strong reductions in customer store traffic will likely reflect in VeriFone's results.

That said, Galant has turned things around in a much faster time than anyone expected. So I wouldn't be surprised if VeriFone beats on both the top and bottom lines. Even if it doesn't, the good news is VeriFone has seen the worst of its decline. This is a company that is now clearly in recovery mode.

With the shares trading at around $34, up 121% over the past 12 months, the easy money has already been made. But VeriFone can still pay those willing to hold the shares for the next 12 to 18 months -- $40 seems like a fair target, if revenue and margins can improve.

At the time of publication, the author was long AAPL.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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