On Dec 27, we reiterated electronic payment processing and merchant acquiring services provider – Total System Services Inc. (TSS) at Neutral based on the company’s raised financial prospects, partially offset by higher expenses and financial leverage.
Why the Retention?
Estimates of Total System have remained stable post third-quarter 2013 results on Oct 22. The company’s earnings per share of 46 cents and revenues $588.1 million beat the respective Zacks Consensus Estimate of 45 cents and $588 million. Nonetheless, the top- and bottom line outpaced the year-ago results by 25.6% and 35.3%, respectively.
Results reflected revenue growth within North America and merchant services, which boosted overall transaction volume and new accounts. The inclusion of NetSpend as an operating segment during the quarter also added to the upsurge. However, lower revenues from the international segment, higher operating and merger expenses coupled with higher cost of services deteriorated the operating cash flow.
Following the release of the third-quarter results, the Zacks Consensus Estimate for 2013 remained static at $1.62 per share in the last 60 days. Meanwhile, the same for 2014 dipped by a penny to $1.93 a share over the same duration.
Nonetheless, on a year-over-year basis, earnings are projected to grow 25.5% in 2013 and 19.2% in 2014. With the Zacks Consensus Estimate for both 2013 and 2014 showing no clarity, the company now has a Zacks Rank #3 (Hold).
Total System’s recent NetSpend acquisition has been drawing incremental operating leverage and core synergies. The acquisition added over 1,000 retail locations and recorded over 20% growth in direct deposit active cards and gross dollar volumes (GDV) in the third quarter, significantly expanding margins.
Alongside, the increasing accounts on file as well as strategic alliances, improved pricing and technical upgrades also validate the significant rise in guidance. However, the latest acquisition has, at the same time, amplified financial risk for the company on account of higher expenses and increased debt, raising caution over margin and cash flow growth.
Other Financial Stocks That Warrant a Look
While we remain on the sidelines with regard to Total System for some time, other better-ranked stocks in the financial sector include Alliance Data Systems Corp. (ADS), Heartland Payments Systems Inc. (HPY) and Visa Inc. (V). All these stocks bear a Zacks Rank #2 (Buy).