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A VeriFone Systems Inc (PAY) Insider Thinks the Market Overreacted to Bad News

VeriFone Systems Inc (NYSE:PAY) dropped about 20% on June 6th after the company released a disappointing 10-Q for the fiscal quarter ending in April (the second of VeriFone Systems Inc (NYSE:PAY)’s fiscal year). With the $1.8 billion market cap provider of electronic payment equipment- for example, credit card swipe-and-sign terminals at cash registers- already doing poorly prior to that point, the stock is now down over 50% in the last year. Alex Hart, a member of the company’s Board of Directors, seems to believe that the market reaction to VeriFone Systems Inc (NYSE:PAY)’s results was overstated. Our database of insider trading filings shows that he purchased 10,000 shares of stock on June 14th at an average price of $15.72 per share, nearly doubling his direct holdings. Insider purchases are often considered bullish signals because insiders should generally prefer to diversify their wealth unless they are particularly confident in the company’s prospects, and studies do in fact find a small outperformance effect for stocks bought by insiders. Read our analysis of studies on insider trading.

The 10-Q showed that in the first half of the current fiscal year, VeriFone Systems Inc (NYSE:PAY) experienced a 4% decline in sales compared to the same period in the previous FY. With little change in costs, the company recorded an operating loss over the last six months; if we add back litigation loss contingency expenses, then operating income still fell by over 60%. In addition, the most recent quarter was particularly weak: even adding back special items there was a small operating loss, and that was even before getting to interest expenses. The company’s cash flow from operations did increase, and was actually fairly decent at over $130 million over these three months, but that is due to decreases in working capital. Leaving working capital changes out, CFO was $37 million and down considerably versus a year earlier. That figure is less than the cash Verifone used on capital expenditures.

VeriFone Systems Inc (PAY)Wall Street analysts are projecting adjusted earnings per share of $1.42 in the current fiscal year, making for a P/E multiple of 11. That pricing would certainly be in value territory if VeriFone Systems Inc (NYSE:PAY)’s business was stable, i.e. if it managed to halt the decline which we saw in its most recent report. The sell-side actually expects EPS to increase in the following fiscal year, placing the stock at 10 times forward earnings estimates. We track quarterly 13F filings from hedge funds and other notable investors as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can see from our database that billionaire Ken Griffin’s Citadel Investment Group owned 1.2 million shares at the end of March (check out Griffin’s stock picks).