The company behind credit card swiping technology is now working on a system that enables you to “swipe and pay” with your mobile phone. The technology is considered by many experts to be the future of payment systems, so you can imagine the potential this company has.

But what’s really fueling the company’s growth is its pay-at-the-pump gas station systems. Gas stations worldwide, especially in China, are upgrading their payment systems to Verifone’s pay-at-the-pump technology. As such, analysts estimate its revenue could potentially triple in the next four years.

#-ad_banner-#The company behind these two huge trends is VeriFone Systems (NYSE: PAY), the global leader in secure electronic payment systems.

In an attempt to accelerate growth, the company has been busy acquiring niche companies that specialize in payment solutions. In early September, VeriFone bought mobile payment systems provider WAY for $9 million. And, to better integrate encryption solutions, PAY also acquired encryption provider Semtek for $18 million. Most recently, on November 17th, PAY announced it finally reached a takeover agreement with rival Hypercom (NYSE: HYC). The deal is worth about $485 million in stock and should enable PAY to grow more quickly in the European market, where HYC has a stronghold.

Technically, PAY shows strength. It is forming a second ascending triangle, after recently bullishly resolving a long-term ascending triangle pattern.



The first, long-term ascending triangle was formed by resistance — which has now become support — near $23.75 and the major uptrend line off the stock’s November 2009 $2.31 low. This uptrend line currently intersects with the 20-week moving average, marked by the middle Bollinger band, around $26.83.

As the stock bullishly broke its first ascending triangle, it rode the upper Bollinger band higher for several consecutive weeks. Concurrently, the stock formed an accelerated uptrend line. The rising 10-week moving average currently mirrors this uptrend line.

PAY is now trading near its two-year high of $35.94, which it hit in early November. If the stock can surmount $35.94 resistance, it would bullishly resolve the second ascending triangle.

According to the measuring principle — calculated by adding the height of the triangle to the breakout level — PAY could reach a target of $48.13 ($35.94 – $23.75 = $12.19; $12.19 + $35.94 = $48.13). In November 2007, the stock hit an all time high nearby at $48.03.

The indicators are bullish. MACD is on a buy signal. The MACD histogram remains in positive territory.

Relative Strength (RSI) has been on a sustained major uptrend since November 2008. At 71.4 and rising, it has just now reached overbought levels, but strong stocks can become and stay overbought for long periods.

Stochastics and Williams %R, although overbought, have not yet given sell signals.

Fundamentally, the company looks strong.

Verifone reported better-than-expected fiscal third-quarter results (for the period ending July 31st, 2010) and issued upbeat full-year guidance.

Revenue for the most recently reported quarter increased +24% to its highest quarterly level of $248.9 million, from $211.2 million in the year-ago period. Analysts expected revenue of $248.8 million. International demand for new payment systems carried growth.

On December 2nd, Verifone will report fiscal full year 2010 results. As the company expands into new markets like mobile phone transactions, its expects fiscal full-year revenue to increase at least +16.4% in the range of $984-$989 million, from $845.1 million a year-ago.

By 2011, revenue is expected to increase a further +11.9% to $1.1 billion, as gas stations in China implement Verifone’s new payment systems.

The earnings outlook is equally upbeat.

In the fiscal third-quarter, VeriFone reported better-than-expected earnings of $0.36, up +39% from $0.26 in the year-ago period. According to Thomson Reuters, analysts expected earnings of $0.30.

With expansion into Europe and China, VeriFone expects its fiscal full-year earnings to increase at least +48.4% to $1.26-$1.27 from $0.85 in the previous fiscal year. By 2011, analysts expect earnings to increase at least another +26.2% to $1.59.

Although PAY is currently richly valued, it has an exceptional return on equity (ROE) of 91.2%.

Action to Take –> Given that the company is both fundamentally and technically strong, I would go long on PAY if it breaks nearby overhead resistance at $35.94.

I would place a buy-on-stop order at $36.29, just above the current intersection of the upper Bollinger band. This means if PAY does not hit or go above $36.29, you will not enter the position. I also recommend a stop-loss at $26.81, just below the current intersection of the major uptrend line and the 20-week moving average.

As calculated by the measuring principle, my target is $48.13. The risk/reward ratio is: 1.25:1.