On Sep 4, 2013, we upgraded electronic payment processing and merchant acquiring services provider – Total System Services Inc. (TSS) to Outperform based on its latest acquisition that will likely stimulate robust growth, as validated by the raised guidance.
Why the Upgrade?
Total System has witnessed modest upsides in its earnings estimates since its second-quarter 2013 results on Jul 23. While the earnings per share of 34 cents beat the Zacks Consensus Estimate by a penny, total revenue of $478.4 million missed the same benchmark by 0.7%. Conversely, top line exceeded the year-ago results by 3.4% although earnings per share missed it by a penny.
A modest revenue growth was witnessed from North America and merchant services along with higher transaction volume and new accounts. However, lower revenue from international segment, higher operating and merger expenses coupled with higher cost of services and unfavorable currency fluctuations led to deterioration of operating cash flow.
Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 surged 11.8% to $1.61 per share in the last 60 days. Moreover, earnings estimates for 2014 is pegged at $1.94 per share, up 12.1% for the similar period.
Meanwhile, the current estimates reflect 24.7% year over year growth in 2013 and 20.8% upsurge in 2014. With the Zacks Consensus Estimates for both 2013 and 2014 rising steadily, the company now has a Zacks Rank #2 (Buy).
What is the cause for the strong positive bias on the company? While Total System’s merchant acquiring portfolio is steadily gaining traction, the company has bolstered its long-term growth prospects by diversifying through the acquisition of prepaid card services provider – NetSpend Inc. in Jul 2013.
NetSpend covers less than 5% of the prepaid cards and card solutions market, which is further expected to double over the next 4−5 years, laying ample scope of growth for Total System and stimulating conversion of a large chunk of its pipeline accounts in the next 2 years.
NetSpend’s top-line CAGR of 22% in the last 5 years further validate the company’s raised guidance owing to the acquisition. Accordingly, management upped its top-line growth projections within 14–17% in 2013 from a prior growth estimate of 5–7%.
Excluding acquisition-related expenses, earnings and EBITDA are also predicted to grow in high-teens range, up from prior single-digit estimates. The optimistic guidance also bodes well for efficient capital deployment, although higher debt and borrowing costs pose some concern in the near term.
Other Financial Stocks That Warrant a Look
While Total System shows slight upward pressure in the near term, other outperformers of the financial sector including MasterCard Inc. (MA), XOOM Corp. (XOOM) and Official Payments Holdings Inc. (OPAY) carrying a Zacks Rank #2 (Buy) also appear impressive.
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