We issued an updated research report on Total System Services, Inc. TSS on Apr 9, 2015.
Total System is well positioned to reap benefits from the rapidly growing digital payments and prepaid cards market, along with strategic merchant-acquiring alliances. The acquisitions primarily of NetSpend were accretive by about 15% to its top line in 2014.
Additionally, Total System has been striving to enhance its shareholder value via dividend increases and share buybacks. Strong double-digit growth in cardholder transactions and revenues as well as improved operating cash flow, which surged 23.8% year over year to $560.2 million in 2014 after declining in 2013, supported share buybacks worth $165.2 million in the year. It also aided dividend payouts, returning 94% of its free cash flow to shareholders. Moreover, during the fourth quarter, the board approved a new share repurchase plan that authorizes up to 20 million shares for repurchases.
Meanwhile, the ongoing market recovery is rebuilding the confidence of consumers, which in turn is leading to an improvement in client activity. As a result, Total System is benefiting from the rise in total merchant-acquiring services.
Moreover, Total System combines a favorable Zacks Rank #3 (Hold) with the highly desirable Zacks Growth Style Score of ‘B’. While growth is typically associated with revenue or EPS growth, the Growth Style Score goes beyond these obvious measures to incorporate elements from the company’s financial statements to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank # 1 (Strong Buy) or #2 (Buy) offer the best investment opportunities in the growth investing space.
However, total operating expenses – 19.6% higher year over year in 2014 – have shown a rising trend. As a result, operating margin decreased to 25.7% in 2014 from 38.2% a year ago. The 2015 operating margin growth outlook also appears stressful given additional expenses related to the NetSpend acquisition as well as loss of revenues from the discontinued operations in Japan.
The company has a significantly high backlog of accounts. As of Dec 31, 2014, Total System had a pipeline of approximately 0.5–0.6 million accounts, in the international and North America segments, for conversion. However, timing is an important factor and any delay in the conversion result will adversely affect the top line and increase expenses. Overall, given the likeliness of cutbacks at card issuers and slow conversion of accounts in pipeline, which also increases expenses, the company’s client accounts warrant a challenging outlook for 2015 and beyond.
Stocks to Consider
Better-ranked stocks in the same sector include CBIZ, Inc. CBZ, Ingenico S.A. INGIY and The Western Union Company WU. While CBIZ, Inc. sports a Zacks Rank #1 (Strong Buy), Ingenico S.A. and The Western Union hold a Zacks Rank #2 (Buy).
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