Has VeriFone Systems Inc (PAY) Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock and then decide whether VeriFone Systems Inc (NYSE:PAY) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.

Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.

Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.

Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.

Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.

Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let’s take a closer look at VeriFone Systems Inc (NYSE:PAY).

Factor What We Want to See Actual Pass or Fail?
Growth 5-year annual revenue growth > 15% 16.5% Pass
1-year revenue growth > 12% 30.3% Pass
Margins Gross margin > 35% 41.5% Pass
Net margin > 15% 4.3% Fail
Balance sheet Debt to equity < 50% 90.9% Fail
Current ratio > 1.3 2.12 Pass
Opportunities Return on equity > 15% 6% Fail
Valuation Normalized P/E < 20 26.49 Fail
Dividends Current yield > 2% 0% Fail
5-year dividend growth > 10% 0% Fail
Total score 4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at VeriFone last year, the company has lost two points, as net margins and return on equity have plunged. The stock has gotten crushed, falling about 60% over the past year, with a substantial portion of that drop having come in just the last month.

VeriFone Systems Inc (NYSE:PAY) is a big player in the push toward mobile payment systems that will allow consumers to make purchases using smartphones and other mobile devices rather than through credit cards. The industry has drawn in intense competition both among established players in the payment-systems business as well as with innovative companies seeking to make a mark on the business for the first time. eBay Inc (NASDAQ:EBAY)‘s PayPal has established itself as the leader in online-based mobile payments, while privately held Square is hitting at individual and small-business users. Meanwhile, Groupon Inc (NASDAQ:GRPN) and Intuit Inc (NASDAQ:INTU) are both using their established business clients as potential cross-selling opportunities for their own mobile payment offerings.

Recently, VeriFone Systems Inc (NYSE:PAY) hasn’t handled that competitive pressure particularly well. Last month, the company slashed its preliminary estimates for its fiscal first quarter as well as cutting guidance for the current quarter, sending the stock down nearly 40%. When it released its full first-quarter report earlier this month, the news was just as bad as expected, as the company said that it had failed to meet the needs of its local merchants.

The bad news led to CEO Doug Bergeron’s resignation last week, which led to a small bounce for the stock. Yet even with new leadership, it’s uncertain whether VeriFone can catch up after the ground it has lost with its customer base.

For VeriFone Systems Inc (NYSE:PAY) to improve, it needs to reorient itself to the new reality in payment systems. Otherwise, it risks getting left behind for good and having little chance of ever becoming a perfect stock.

The article Has VeriFone Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of eBay and Intuit.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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