Verifone (PAY): Cash in on the Growing Popularity of Credit Cards

Cash in on the Growing Popularity of Credit Cards with Verifone (PAY)

By: Mike Cintolo
Editor
Cabot Top Ten Report

Published: October 26, 2007

How would I describe my own investing style? Generally speaking, I practice many aggressive-type traits -- fully invested with fewer than ten stocks, make use of margin at times, and so on.

However, I'm also wary of big swings in my account -- something that usually comes with aggressive-growth investing. So I tend to focus on mid- to large-sized companies with plenty of trading volume (often more than one million shares per day) and great growth prospects. These are the names institutional investors tend to pile into during a bull market.

I think one such stock is VeriFone Holdings (NYSE: PAY, $43.61), which is benefiting from the same mega-trend as MasterCard (MA) -- more people are paying with plastic instead of cash, especially in developing countries.

VeriFone is a play on the rising use of credit and debit cards instead of cash, in both the U.S. and emerging markets. The company is the leading provider of point-of-sale and wireless payment systems -- when you swipe your card at a gas station or grocery store, you're likely using a VeriFone system. Every year, a higher percentage of payments are made with plastic instead of cash, and that means higher demand for this firm's software and products. Emerging markets are a huge opportunity, with many governments promoting credit-based purchases, especially wireless ones (such as taxi cabs taking credit payments, which, incidentally, they do in New York and Philadelphia). An acquisition last year has rounded out the product line, and has helped continue the company's string of superb earnings results and lofty profit margins. It's not a barn burner, but we think the stock will outperform the market.

The stock came public in April of 2005 and immediately put on a good show for many months. But beginning this February, PAY built a long, strong base, wearing out all the "weak" hands in the process. A better-than-expected earnings report (revenues up +57%, earnings up +50%) in early September sparked some high-volume buying, and that was followed by a move to new highs late last month -- which came on the heaviest volume the stock's ever traded!

Clearly, institutions, after quietly accumulating shares for a few months, realize the cat's out of the bag -- they now have to pay up. We believe they will, and that should lead to solid upside for VeriFone's stock. Encouragingly, the stock held relatively firm in the recent decline in leading stocks, another sign big investors are supporting the stock on dips.

Mike Cintolo
Editor
Cabot Top Ten Report

About Mike Cintolo [includes/bios/cintolo.htm]

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