Should Investors Dial VeriFone Ahead of Earnings?

NEW YORK (TheStreet) -- The first six months of the year have been anything but dull for payment-processing king VeriFone (PAY).

The stock gained as much as 21% in the first four weeks of the year, and a month later, plummeted 50% because of struggles in execution and rising competition from the likes of privately held Square and rumors that Apple ( AAPL) would dominate mobile payments with its so-called "eWallet."

But that shouldn't have been a surprise. Five months prior to the Street waking up to these concerns, I warned investors about that possibility and suggested that Apple could kill off VeriFone.

Feeling betrayed by their company's lack of preparation, investors didn't take the stock's 50% decline lying down. They demanded action from the company's board of directors. And on March 11, investors got an answer. The company announced that CEO Doug Bergeron was stepping down.

Since then, the stock is up 14%. But shares are still down 21% since the beginning of the year, which has now brought about the obligatory "value play" angle. But other than that Bergeron was asked to fall on the sword, has anything really changed for VeriFone? I don't believe so.

On Wednesday, investors will find out more as the company reports its fiscal second-quarter earnings. While some are betting on an upside surprise, the Street is not as optimistic. Analysts are calling for an 8% decline in revenue and a 26.6% drop in earnings per share.

The company is coming off a decent first quarter where both revenue and earnings per share exceeded estimates. Given the uncertainty created by Bergeron's departure, however, it wouldn't be surprising if the company missed both targets for its second quarter.

Besides, the macro environment hasn't been good. Retail figures from end users of point-of-sale terminals such as Wal-Mart ( WMT), Target ( TGT) and McDonald's ( MCD) have shown reduced customer traffic.

These businesses now understand that in order to grow, they have to reduce transaction time. That is why self-pay kiosks have become more popular. But if an iPhone app can fulfill the service criteria, traditional payment-processing companies can become extinct.

All of that would hurt not only VeriFone, but smaller rivals such as Ingenico and Global Payment ( GPN), which have begun to steal some of VeriFone's thunder. But unlike VeriFone, Ingenico and Global Payments have not had to deal with poor execution.

Does VerfiFone have the ability to turn things around? I believe it does. But the track record over the past 12 months suggests otherwise. And with the stock trading at just 10 times fiscal 2014 estimates, the Street is pricing VeriFone as if it can't recover. With the open CEO position, that is understandable.

VeriFone's current valuation looks interesting for those who want to play a short-term trade. But I would be careful about getting trapped here. I don't believe that the long-term prospects are as promising as they once were - not with products such as Intuit's ( INTU) Go Payment growing in popularity.

However, as I've said nine months ago and recently repeated here, the biggest overhang for VeriFone is Apple. Soon, like Visa, the iPhone will be "everywhere you want to be."

At the time of publication, the author held shares of Apple and had no position in any of the other stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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