Times of Oman
Nov 26, 2015 LAST UPDATED AT 04:06 AM GMT
After Target hack, Verifone smart card readers could shine
January 19, 2014 | 12:00 AM
People shop at a Target store during Black Friday sales in the Brooklyn borough of New York, November 29, 2013. Photo - Reuters

A data breach at Target Corp that exposed the credit card information of tens of millions of holiday shoppers was a major black eye for the retailer. In its wake, investors and analysts are circling companies that could benefit from a major upgrade in credit card technology.

One of their favorites: Verifone Systems Inc, a $3.2 billion market cap company that is one of two major global manufacturers of point-of-sale terminals and mobile payments systems and could profit from any major upgrades of payment technology. Analysts at JPMorgan Chase and Jefferies & Co upgraded their outlook for the company in the last 10 days, helping send its shares price up about 25 percent since the Target breach was first reported on December 18.

Yet for its shares to continue to rally, Verifone must prove to analysts and portfolio managers it has taken steps to right its own ship after several years of choppy performance.

That question mark is a product of several years of poor acquisitions and a history of missing earnings estimates that left the company's shares down more than 20 percent for the year just before the Target breach become public - in a bullish year for stocks. It hangs over the company as a new wave of credit card technology looks poised to finally make inroads in the U.S. after being the standard in Europe for years.

"Verifone has a tremendous and recently unappreciated position in the industry, yet it's kind of a messy place. The new management team looks great, but this is like waiting for Godot," said Jeffrey Bronchick, whose $56.3 million Cove Street Small Cap Value fund has one of the best performances in its category over the last three years, according to Morningstar data. In the Samuel Beckett play, two characters wait endlessly for Godot, who never shows up.

Verifone declined to make executives available for this article.

Bronchick said that he sold his position in the company during its recent rally in large part because, at approximately $29 a share, its stock price looks expensive. The stock trades at a forward price-to-earnings ratio of 19.5, which is well above the approximately 16 times multiple of the broad market.

"The stock is reflecting a seamless next two years and I think there's little likelihood of it," he said.


The bullish case for Verifone rests largely on expectations that the slow-to-change credit card industry is set to adopt new technology that could cut fraud in the United States. The country accounts for nearly half of global credit card fraud despite handling only 27 percent of all card volume, said Darrin Peller, an analyst at Barclays who covers the industry.

Merchants, retailers and credit card issuers have long resisted upgrading to a card system, now ubiquitous in Europe, that stores information on chips embedded in the cards themselves. Rather than relying on the easily copied magnetic stripe on the back of cards, these cards, called EMV for Europay, Mastercard, Visa, create a new code for every transaction, making it difficult for hackers to duplicate.

As an incentive to push card issuers to upgrade, Visa has warned that merchants' banks may start bearing the costs of fraud starting in October 2015 if the merchants don't upgrade.

Some Verifone terminals were in use at Target locations, according to Peller, the Barclays analyst. That investigation continues and Peller said it was unclear whether they were involved in the data breach, but he did not expect Verifone to face liabilities in connection with the loss.

Target said on January 10 it could not yet estimate the costs it would face in relation to the breach. The company did not respond to a request for comment or say what terminals it used. Verifone declined to comment for this article.

The data breach at Target has created "a growing sense of urgency" among merchants to upgrade their point-of-sale terminals in order to read EMV cards, noted Andrew Jeffrey, an analyst at SunTrust Robinson Hum

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