VeriFone Could Gain From Hacking Attacks

 | Feb 13, 2014 | 1:30 PM EST
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It seems hacking scandals are in the news everyday. Target (TGT) disclosed in December that hackers stole information on as many as 40 million customers. Shortly thereafter, Neiman Marcus and Michaels Stores reported its customer data might have been compromised too.

On Tuesday, the Bitcoin community was under a massive denial of service attack that has crippled the whole cryptocurrency world.

It seems no one can protect us from these ruffians. Americans were shocked to learn these types of attacks are relatively rare in Europe since Europeans switched to credit cards with embedded chips over a decade ago. When a European buys with a credit card, the terminal detects the embedded chip and asks the customer to enter a pin number. In order to complete the transaction, the holder has to have the card, the chip and the pin number. Credit card fraud of the type we have in America is almost unheard of in Europe.

According to the Nilson Report, the United States accounts for almost half of the $12.42 billion annual global fraud losses on credit cards. In the last decade, over 100 million people have been affected by credit card fraud.

Because Target wouldn't spend $40 million on credit card security a few years ago, it could face as much as a $1.1 billion liability to banks and a tangle of litigation from consumers. After these recent fiascos, every major retailer is looking to upgrade their security.

The first place investors will look is VeriFone (PAY). VeriFone dominates the retail credit card terminal space. VeriFone already makes the technology for Europe and adapting it to America should be very easy.

Since the Target security breach, VeriFone shares are up 21%. Analysts think sales could jump 9% by fiscal 2015 to $1.95 billion. The incremental revenue should drop to the bottom line and earnings per share are estimated to increase 34% to $1.88 by next year.

While it sounds like a good idea to buy VeriFone, because they are going to sell lots of terminals, anyone who was around in the 1990s, before Hewlett-Packard (HPQ) acquired the company, will remember how bad the stock performed.

Back in the 1990s, grocery stores were just rolling out "multilane" terminals. (Yes, there was a time in America when you needed cash or a check to pay for groceries.) Investors bought into the thesis PAY would make huge profits as grocery chains installed millions of credit card terminals in every check out lane throughout the nation.

It turns out that grocery stores and other multilane retailers had the upper hand. They demanded steep discounts on terminals and forced VeriFone's margins down. VeriFone turned quickly into a maker of low-margin commodity hardware. Eventually, Hewlett-Packard bought the company. HPQ brought VeriFone public (again) about five years ago.

It seems the stock has already moved ahead of itself. For the stock to get back to the $50s, we need more evidence that retailers and credit card issuers are getting more serious about security.

For fiscal 2014, VeriFone is expected to grow revenue just 5%. That doesn't feel like retailers, whose margins are already under pressure, are rushing to upgrade their equipment. For the stock to go higher, we need some meaningful increase in guidance. For now, I'm on the sidelines with VeriFone.

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