Keeping VeriFone Shares on Hold
The recent restatement of VeriFone Holdings, Inc.'s (PAY) results for the first three quarters of 2007 involves both lower inventory levels and increase in cost of goods. We estimate the restatement to reduce profitability for the nine-month period by 20 percent. It also opens up the possibility of restructuring within the company.
Although VeriFone remains a pure play on the rapid international emergence of electronic payments, the restatements negate the near-term probability of any bullish sentiment for its stock price performance. As a result, we are maintaining a Hold rating on the shares.
It appears that VeriFone should be able to put its historical accounting errors and financial restatements behind it, and that the company will move forward as the world's leading point-of-sale technology company. Our view of a positive accounting outcome is based on the confidence in the company's senior management and anecdotal evidence that the process is moving forward.
VeriFone's relative profit advantage allows it to support ongoing market share gains in the multi-lane retail channel and fund the industry's leading research and development effort. Although it may be argued that the recent sharp stock sell-off offers long-term investors an attractive entry point, we would prefer to stay on the sidelines and wait till the accounting issues and its near-term impact is played out. Given the near-term uncertainty, we set a reduced target price of $13, which is roughly 12.0 X our FY2008 EPS estimate.
RIMM to Keep at High Valuation
We maintain our Buy recommendation and the same valuation target for Research In Motion Ltd. (RIMM), following last week's financial release for first quarter fiscal 2009 (ended May 31). Revenue continues to increase year-over-year with recognizable high-end smart-phone device opportunities throughout the world.
RIMM's channel sales expansion initiatives are also considered an impetus for meaningful top-line growth as the company introduced a series of next-generation BlackBerry smart-phones, specifically targeting CDMA EV-DO, EDGE, and Wi-Fi networks. In the current fiscal year, RIMM is likely to introduce further 3G-enabled high-end BlackBerry devices.
The management has also provided a respectable second quarter financial outlook as the company continues to maintain favorable average selling prices (ASP), due to technical superiority, despite facing increased competition. The company's net cash position over $2 billion also enables future R&D expenditures in order to improve products and maintain a competitive edge.
RIMM shares are trading at 34.3x our earnings estimate for fiscal year 2009. This represents a significant premium to both the S&P 500 benchmark and the peer group metric. With respect to other selected valuation metrics, the stock is also trading well above its peers.
