VeriFone High-Jumps Over Low Bar

NEW YORK (TheStreet) -- Having once called the company a disaster in the making, I've pulled no punches when it comes to discussing the state of payment processing giant VeriFone (PAY).

Not only has the company been burdened with chronic struggles in execution, but VeriFone -- which recently ousted CEO Doug Bergeron -- has seen its market share erode amid threats from privately held Square and Intuit ( INTU), among others.

It goes without saying that all of these concerns have been reflected in the stock price, which at one point was down close to 50% on the year, effectively ending Bergeron's tenure as CEO. Believing the company had finally "paid its dues," retail investors are ready to believe in this story again, citing (among other things) VeriFone's strong third-quarter results. But is it worth the reward of the 47% jump in the stock price since the middle of June?

Despite the third-quarter performance, which included a revenue beat of at least 5% (according to some estimates), I don't think retail investors should get carried away here. I'm not suggesting the sequential improvement was not meaningful. I just don't believe this company, which is still without a permanent CEO, has sufficiently addressed its lack of competitive leverage.

I suspect VeriFone bulls will disagree. But let's not pretend that in the June quarter management didn't "throw everything out, including the kitchen sink." What I mean by this is, given the dire state of the company, along with a CEO search, management had essentially thrown its hands up with respect to guidance -- lowering the bar so low that research firm Zack's immediately downgraded the stock to "strong sell."

So, yes, the results came in much better than expected. But to be perfectly honest, I don't think anyone that has a finger on the pulse of this company really expected much.

Another thing that's being ignored here is that, accompanied by this "outstanding quarter" is a 16% decline in revenue. Not to mention, this quarter revealed more margin erosion, which led to a miss.

Investors conveniently ignore how Ingenico ( INGIY), one of VeriFone's main rivals, has been growing revenue year over year by as much as 24%. Both companies are competing for the same market share. Yet, somehow investors justify giving VeriFone the benefit of the doubt while blaming the "weak economy" for the company's poor performance.

However, VeriFone's operational deficit has been going on far too long for the economy to continue to take the blame. This is something that I can't quite understand. To the extent that this "better-than-expected quarter" is a high jump towards long-term execution, I disagree. Clearly, though, given the 47% rise in the stock over the past three months, the Street already assumes that things will get better. I just don't believe it will.

What makes this company's prospects even more dire is that Apple's ( APPL) new iPhone 5S comes equipped with a fingerprint scanner, the type of security that encourages mobile payments and person-to-person transactions, which should further threaten VeriFone's legacy payment systems. With eBay's ( EBAY) ever-popular PayPal business, it's only a matter of time before cash registers slowly begin to fade away.

I don't want to make this all about "doom and gloom." Suffice it to say, I'm not as optimistic about VeriFone's future as the company's investors appear to be. While it's certainly possible that VeriFone can turn things around, consider that after a 9-month vacancy in the CEO post, it doesn't appear as if there are many candidates willing to inherit this headache. I don't blame them.

I will admit that VeriFone's current price does look interesting, especially given that shares are still down close to 40% from their 52-week highs. But with so many unknowns, and given the fact that the stock has rebounded nicely from a brutal June quarter, I wouldn't press my luck. Now is the time to bail and take profits. In any other scenario, I see investors "paying" too hefty of a price for their optimism.

At the time of publication the author had a position in AAPL.

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

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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