VeriFone Systems Inc. (PAY), the largest maker of credit-card terminals, dropped the most in more than three years after an analyst questioned the company’s method of accounting for organic growth.
VeriFone fell $6.80, or 12 percent, to $47.64 at the close in New York, its biggest decline since March 2, 2009. Shares of the San Jose, California-based company had climbed 53 percent this year before today.
“We believe the 11.8 percent organic growth stated on the 1Q12 earnings call significantly exaggerates the ‘true’ flat 1Q12 organic growth,” Bryan Keane, an analyst at Deutsche Bank in New York, wrote in a note to clients today.
Keane downgraded VeriFone to a sell rating from a hold, and lowered the 12-month target price to $40 a share from $44.
“In our view, organic growth is being inflated through acquisitions,” he wrote. Keane added: “The more appropriate method to calculate organic growth is to look at all acquisitions as if they were owned in both comparable periods.”
While VeriFone’s growth is expected to improve in 2012, “we believe it will likely be in the 4 percent to 6 percent range, well below the 12 percent to 13 percent guided range,” Keane wrote.
Pete Bartolik, a spokesman for VeriFone, said the company stood by its growth calculations.
“VeriFone uses a methodology of calculating organic growth prescribed by the vast majority of investors and Wall Street analysts: excluding revenue of all acquired companies, large and small, until 12 months after acquisition,” Bartolik said in an e-mailed statement.
‘True Organic Results’
“Deutsche Bank is choosing to include in its calculation the revenue of acquired companies as if VeriFone had owned them for the entire current and year-ago period,” he added. “We believe this does not reflect the true organic results of VeriFone’s business and we reaffirm our expectations for 10-15% organic growth rates for fiscal year 2012 and long-term.”
Today’s Verifone drop is a good buying opportunity, Andrew Jeffrey, an analyst at SunTrust Robinson Humphrey Inc. in San Francisco, said in a telephone interview.
“The company has a proven track record, and this space has generally coalesced around incumbents, so VeriFone has been our top pick this year, and we are standing by it,” Jeffrey said in a telephone interview. “It may be the best time of the year to buy the stock.”
Jeffrey, who has a buy rating and a $65 target price on Verifone, expressed concern that organic growth was being confused with pro forma figures.
‘Apples and Oranges’
“It appears that apples and oranges are being compared,” Jeffrey said. “The concern about longer-term competitive threats in a space of payments complexity may be offset by the tailwind that comes from new services, share gains, and upgrades, which means I think the company beats its numbers.”
The focus is on shifting U.S. electronic payments away from systems that rely on the magnetic stripes on the back of credit and debit cards to so-called EMV technology, cards embedded with microchips.
“We are seeing increased complexity at the point of sale,” Jeffrey said. “What PayPal (EBAY) is doing for its point-of- sale payment system with Home Depot, what Google (GOOG) Wallet will do, the Visa products, the ISIS platform, and what Apple will decide to do in mobile payments, all bode well for VeriFone.”
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