VeriFone Systems Inc (NYSE:PAY) dropped about 20% on June 6th after the company released a disappointing 10-Q for the fiscal quarter ending in April (the second of VeriFone Systems Inc (NYSE:PAY)’s fiscal year). With the $1.8 billion market cap provider of electronic payment equipment- for example, credit card swipe-and-sign terminals at cash registers- already doing poorly prior to that point, the stock is now down over 50% in the last year. Alex Hart, a member of the company’s Board of Directors, seems to believe that the market reaction to VeriFone Systems Inc (NYSE:PAY)’s results was overstated. Our database of insider trading filings shows that he purchased 10,000 shares of stock on June 14th at an average price of $15.72 per share, nearly doubling his direct holdings. Insider purchases are often considered bullish signals because insiders should generally prefer to diversify their wealth unless they are particularly confident in the company’s prospects, and studies do in fact find a small outperformance effect for stocks bought by insiders. Read our analysis of studies on insider trading.
The 10-Q showed that in the first half of the current fiscal year, VeriFone Systems Inc (NYSE:PAY) experienced a 4% decline in sales compared to the same period in the previous FY. With little change in costs, the company recorded an operating loss over the last six months; if we add back litigation loss contingency expenses, then operating income still fell by over 60%. In addition, the most recent quarter was particularly weak: even adding back special items there was a small operating loss, and that was even before getting to interest expenses. The company’s cash flow from operations did increase, and was actually fairly decent at over $130 million over these three months, but that is due to decreases in working capital. Leaving working capital changes out, CFO was $37 million and down considerably versus a year earlier. That figure is less than the cash Verifone used on capital expenditures.
Peers for Verifone include NCR Corporation (NYSE:NCR), formerly known as National Cash Register and still involved in the production of point of sale terminals as well as self-service kiosks, and eBay Inc (NASDAQ:EBAY), whose PayPal may prove a competitive threat by offering a mobile payment system. NCR Corporation (NYSE:NCR) experienced double-digit growth rates on both top and bottom lines in the first quarter of 2013 versus a year earlier, and analyst expectations for continued growth result in a forward earnings multiple of 11 and a five-year PEG ratio of 0.8. It’s surprising to us that it doesn’t seem to carry much of a premium to VeriFone Systems Inc (NYSE:PAY) despite its stronger performance. eBay Inc (NASDAQ:EBAY) has also been doing well, going by recent financials, though in that case analysts seem to be a bit less optimistic: the stock features trailing and forward P/Es of 25 and 16 respectively. It’s an interesting company, but the valuation is high enough that we would prefer to wait for more results.
We’ve seen that VeriFone Systems Inc (NYSE:PAY)’s operating income after adding back litigation loss contingency expenses fell on a q/q basis, while it had risen a year ago, and that while the company isn’t in danger as far as cash flow from operations is concerned the changes in working capital mask weakness on that front as well- particularly compared to the capex numbers. As a result we aren’t confident that Verifone can maintain its current business, and the stock’s valuation wouldn’t make it a good value if earnings per share were to decline further. Even with this fairly large insider purchase, then, we would avoid the stock for now.
Disclosure: I own no shares of any stocks mentioned in this article.
