On Feb 28, we issued an updated research report on
Total System Services Inc.
). Although the past and recent acquisitions have helped the
company reach the $2.0 billion mark in revenues in 2013, higher
debt-levels on account of these acquisitions are expected to mar
the desired upside in the near term.
Moreover, Total System has delivered negative earnings
surprise in 2 of the last 4 quarters with an average beat of
0.02%. The company's fourth-quarter earnings were in line with
the Zacks Consensus Estimate but beat the year-ago quarter number
Meanwhile, the acquisition of NetSpend in Jul 2013 has made
Total System the 2
largest program manager of dollars reloaded in prepaid cards as
per the Mercator Advisory Group, thereby enhancing its footprint
in the U.S. prepaid card industry and bolstering long-term growth
through a diversified portfolio.
While the NetSpend acquisition is expected to be accretive to
earnings within its first year, ending Jun 2014, it also
validates the company's bright top-line guidance in the band of
17-19% in 2014 and adjusted EBITDA within 17-20%, both up from
the 2013 equivalent levels.
However, the cash outlays on acquisitions and technological
developments have taken a toll on a healthy cash flow growth
trend. Adverse asset-liability changes as well as acquisitions
and software purchase payments resulted in deteriorated operating
cash flow in 2013.
Subsequently, expected higher debt obligations, expense flow,
operating margin reduction and minimal synergies from NetSpend in
2014 make us wary about cash flow growth and healthy capital
deployment in the upcoming quarters. Simultaneously, increased
competition, regulatory challenges and exposure to interest rate
and foreign exchange volatility raise our concern.
An adverse risk-reward balance in the near term led to
negative estimate revisions for 2014. Seven out of eight
estimates for 2014 were revised downward over the past 30 days
with no upward revision. This led to a significant decrease of 12
cents in the Zacks Consensus Estimate for 2014, which now stands
at $1.80 per share.
Key Picks in the Sector
While Total System carries a Zacks Rank #4 (Sell), some
better-ranked stocks in the financial sector include
Verifone Systems Inc.
Global Payments Inc.
Euronet Worldwide Inc.
). All these stocks bear a Zacks Rank #2 (Buy).
EURONET WORLDWD (EEFT): Free Stock Analysis
GLOBAL PAYMENTS (GPN): Free Stock Analysis
VERIFONE SYSTMS (PAY): Free Stock Analysis
TOTAL SYS SVC (TSS): Free Stock Analysis
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