Goldman Just Upgraded VeriFone Because It's 'Not A One Trick Pony'

In a report published Tuesday, Goldman Sachs analysts upgraded the rating on VeriFone Systems Inc PAY from Neutral to Buy, while raising the price target from $38 to $44.

The analysts expect VeriFone's stock to outperform based on the following reasons:

• Significant improvement in the company's underlying performance is underappreciated - The analysts said that there are "multiple drivers of growth beyond the EMV deadline"
• Potential for meaningful margin expansion and FCF growth due to restructuring, rationalization of the supply chain and mix shift in favor of high margin US business
• The valuation discount, at around 25 percent on 2016 P/E, to VeriFone's closest peer, Ingenico, should narrow as the former generates improving EPS growth

The analysts expect VeriFone's 2Q earnings, scheduled to be reported in early June, to reflect further US market share gains, benefits from improved acquirer partnerships in SMB and early traction from its Payment-as-a-Service initiative.

In the report Goldman Sachs noted, "We believe market concerns around a revenue cliff post October 2015 EMV deadline are overdone and see ongoing investments in newer product streams to drive 8% revenue CAGR over CY14-17. We believe FY15 will mark an inflection point in FCF generation driven by improved profitability, reduction in restructuring costs and normalization of capex."

"In our view, this opens up options for pursuing a more active capital allocation strategy with an increasing mix of M&A. Although high non USD exposure (~50% of revenues) keeps FY15 earnings in check, we believe this is now largely reflected in estimates," the analysts added.