Morgan Stanley Lowers Price Target On VeriFone Systems, Sees Amplified Risk

"We don't expect new service opportunities to overcome slowing NA terminal sales. And if SMBs continue to drag their feet, debt refinancing may become more onerous," analyst James Faucette wrote in a note.

VeriFone faces dramatic slowdown in EMV terminal sales in North America after two years of benefit as large retailers and petrol convenience stores have already upgraded, while SMBs are upgrading at a slower rate.

"Terminal upgrades at gas pumps present opportunity, but may not be sufficient to offset tough comps/weak demand from SMBs. In aggregate, we expect double digit rev declines in NA in F17," Faucette highlighted.

Related Link: Reports Of Private Equity Interest In VeriFone Systems Came As No Surprise To BTIG Analysts

Faucette, who has an Equal-Weight rating on the stock, also pointed out the potential need to refinance about $800 million of debt, which comes due in 2019. The refinancing would become difficult if the company generates free cash flow of only $110 million–$120 million per year over the next few years, which may impact refinancing terms and lower earnings power.

Meanwhile, the analyst cut his fourth quarter revenue view to $461 million from $535 million to reflect weaker North America revenues and challenges in LatAm and Turkey. The analyst also trimmed his adjusted EPS to $0.29 from $0.51 reflecting lower EBIT margins of 10.8 percent (vs.14.4 percent).

Faucette also slashed his FY17 revenue forecast to $1.931 billion (-3 percent year-over-year from +4 percent) and adjusted EPS estimate to $1.58 from $2.21, driven by low double digit declines in North America, flat LatAm revenues and modest growth in emerging markets' margins of 13 percent.

Shares of VeriFone closed Monday's trading at $16.04 and were down 1.40 percent at $15.81 early in Tuesday's regular trading session.

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