We are reiterating our Neutral recommendation on
Total System Services Inc
) based on the current sustainability factor. Although the company
has been witnessing improvement over the past few quarters, risks
related to operating leverage remain at the forefront.
Total System reported first-quarter 2012 operating earnings of
30 cents per share, in line with the Zacks Consensus Estimate but a
nickel higher than the year-ago quarter. Consequently, net income
increased 15.6% to $56.4 million from $48.8 million in the
Results reflect consistent growth in revenues across all
business segments and increase in overall transaction volume and
new accounts. However, higher-than-expected cost of services and
selling, general and administrative (SG&A) expenses, along with
higher taxes, partly offset revenue growth.
After a series of revenue contraction during the peak of
financial crisis, Total System has swung to revenue growth since
the second quarter of 2010, following which revenue rose by 5.3%
year over year in 2011, from 2.4% year over year in 2010 and a
contraction of 2.0% in 2009. Revenues further grew 7.4% year over
year in the first quarter of 2012, thereby reflecting modest
improvement in accounts on file, transaction volumes and spike in
total acquiring services and its long-term contract portfolio.
We believe the company is further expected to benefit from its
leading technology platform, improved pricing and healthy consumer
spending once the economy stabilizes to normal levels. The slow but
steady growth momentum is also validated by management's buoyant
earnings outlook for 2012.
Moreover, Total System's risk-free balance sheet along with a
modest cash position and cash flow generation provide a viable
scope for share repurchases and acquisitions.
Also, its pipeline of international opportunities should help
stimulate above-average growth. Alongside, the company poses a
healthy current ratio, thereby appearing well-equipped to meet most
of its capital expenditure needs through internal funds.
On the flip side, though, Total System's anticipated growth is
being marred by a higher backlog of accounts, coupled with
increased risk from interest rate volatility and foreign currency
Additionally, Total System faces intense competition from data
processing, bankcard computer service firms and third-party
software vendors within the U.S. as well as from international
processors and third-party software vendors. The company's prime
Wright Express Corp.
), while it also faces operating challenges from
Discover Financial Services
This implies that Total System has a very dynamic and strong
peer group that competes on various crucial operational factors
such as price, system performance and reliability, versatility of
features, functionality, disaster recovery capabilities, business
continuity preparedness and data security. Amid volatile
macro-economic factors, regulatory challenges and sluggish
fundamentals, the company must fight to keep its edge over its
competitors going forward.
Based on all the pros and cons, the Zacks Consensus Estimate
currently pegs earnings at 32 cents for the second quarter of 2012,
up about 13% year-over-year. For 2012, earnings are projected to
increase to $1.29 per share. This reflects an increase of about 12%
year over year, which is in line with the upper end of management's
guidance of 10-12% growth for 2012. Currently, Total System carries
a Zacks Rank #3, which translates into a short-term Hold rating and
long-term Neutral recommendation.
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