VeriFraud back to being VeriFone:

VeriFone Holdings (PAY), which manufactures the devices which enable debit/credit card transaction automation for merchants, is finally seeing a pop in their stock’s performance – months after an accounting debacle sagged PAY shares to a 52-week low of $10.10.

The San Jose based company was busy this past week, upping forecasts while naming a new CFO to the team- as a part of cleaning house. Veteran Clinton Knowles replaced Barry Zwarenstein after months of allegations and current SEC investigations into VeriFone’s books.

It looks like VeriFone is getting back on the right track after erasing $70 million in overstated profits from fiscal 2007. The company also beat earnings consensus of $0.28 per share [excluding books adjustment and other one-time expenses] and upped guidance for Q4 to $0.36-$0.39 from the original analyst forecast of $0.30 per share.

CEO Douglas Bergeron also pointed out the raised FY 2009 earnings guidance to $1.45/share versus the previous $1.21/share consensus.

The results prompted the following opposite reactions from analysts:

"The optimistic outlook prompted SunTrust Robinson Humphrey analyst Andrew Jeffrey to predict VeriFone's stock will rise to $30 within the next year, up from his previous target of $22.

'We are convinced that VeriFone's historical competitive advantage remains materially intact, even as its two primary competitors have probably used the company's recent travails as an opportunity to take market share,' Jeffrey wrote in a Wednesday research note titled 'Starting Over: Phoenix Rising.'


Other analysts, though, were more skeptical.

In a Wednesday research note Goldman Sachs & Co. analyst Julio Quinteros wrote that VeriFone still appears to be facing 'headwinds' because the company is selling less profitable products, particularly in international markets. VeriFone hopes to offset some of those pricing pressures by lowering its expenses." (AP via Yahoo! Finance)

The $64,000 question is: What now?

Here’s my take:

1. VeriFone has great secular growth potential (25% international, 40% latin America, 25% asia, as per the conference call)

2. The inherit nature of the industry- (i.e. an Oligopoly- I, personally have not seen debit keypads manufactured by any other company)

3. Note the huge pop in MasterCard (MA) over the past year and a half, the IPO buzz surrounding Visa (V) and the Warren Buffett apparent continued buying of American Express (AXP). All of these factors indicate higher margins for VeriFone.

4. Accounting mess cleaned up = takeover target for big tech? No one can rule that out.
This business just seems that it has such vast growth; had it not been for the account debacle, the stock could very well be hanging around in the $40/share range and threatening the 52-week high of $50/share.

Conclusion: Assuming the accounting mess is 100% straightened out- the stock is a bargain, assuming any multiple less than 1.5 times the growth rate. I often screen out stocks with high PEGs [very generally, for long term plays], but this stock really does looks cheap considering the 1.00 PEG ratio.

PAY added nearly 36% after-hours on Tuesday and finished the week at $18.79.

Disclosure: None