Following the release of better-than-expected first quarter results and an increase in guidance by VeriFone Holdings Inc. (PAY), we recently upgraded our rating on the stock to Outperform from Neutral.
Based in San Jose, California, VeriFone designs, markets and services a transaction automation system that facilitates electronic payments between consumers, merchants and financial institutions.
Revenues of $223.4 million in the first quarter of fiscal 2010 were up 2.6% sequentially and up 4.4% year over year. Earnings per share (EPS) came in at 26 cents, easily beating the Zacks Consensus Estimate of 18 cents.
AGREEMENT IN REVISIONS
Management has also upgraded its guidance. VeriFone now expects revenues between $925 million and $940 million in 2010, up from the previous estimate of $900 million to $945 million. Earnings per share (EPS) are forecasted between $1.00 and $1.10, up from the previous estimate of 97 cents to $1.07.
The increase in guidance has led to estimate revisions by analysts covering the stock. Four out of the five analysts covering PAY have raised their estimates in the last 30 days for fiscal 2010 and one in the last seven days, with no revision in the opposite direction. For fiscal 2011 as well, four out of the five analysts covering the stock raised their estimates in the last 30 days and one in the last seven days with no movement in the opposite direction.
Coming to the second quarter, VeriFone expects revenues between $225 million and $230 million, up 12% – 14% year over year. EPS is projected around 25 – 26 cents.
Three out of the five analysts have raised their estimates for the second quarter in the last 30 days and one in the last seven days with no revision in the last seven days.
MAGNITUDE – INCREASE IN ESTIMATES
The current Zacks Consensus Estimate for fiscal 2010 stands at 92 cents, up one cent in the last seven days, compared to the management’s guidance of $1.00 – $1.10.
VeriFone has consistently met or exceeded its guidance. In terms of earnings surprises, earnings exceeded the Zacks Consensus Estimate in the last quarter by 16.67%, while the fourth quarter met expectations. On average, earnings exceeded the Zacks Consensus Estimate by 26.54%.
For fiscal 2011, estimates are up one cent with the current Zacks Consensus Estimate being $1.13.
For the second quarter, the current Zacks Consensus Estimate is 22 cents compared to the management’s guidance of 25- 26 cents.
PAY SHOULD PAY
With the economy showing signs of recovery, revenue growth should pick up in 2010. The prospect for margin recovery may be attributed to increasing inventory write-downs in the recent quarters, which in turn may lead to higher gross margins in the coming quarters.
VeriFone continues to take strategic steps to expand its business both domestically and internationally. Based on a brighter outlook for 2010, we upgrade our recommendation on VeriFone. Our Outperform recommendation is supported by the Zacks #1 Rank (Strong Buy).
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