We are reiterating our Neutral recommendation on
Total System Services Inc
) based on the current sustainability factor. Although the company
has been witnessing improvement in gaining significant contracts
over the past few quarters, risks related to operating leverage
Total System reported second-quarter 2012 operating earnings of
35 cents per share that outpaced both the Zacks Consensus Estimate
of 32 cents and the year-ago quarter's earnings of 28 cents per
Results reflect consistent growth in revenues across all
business segments and increase in overall transaction volume and
new accounts. Strict expense control also boosted the results.
These positives paved way for escalated bottom line and improved
operating cash flow. However, higher-than-expected non-operating
and tax expenses partly offset the revenue growth.
Total System's contract portfolio has got quite a fillip in 2012
with the processing contract attainment for its merchant acquiring
services and technology services through the TSYS PRIME 4 card
management solutions, VAR Partner Connect Program and Mobile App.
In July 2012,
Bank of America Corp.
) also extended its long-term contract for merchant and other card
processing services through a new joint venture, thereby driving
Total System's vigorous efforts of divesting redundant
operations and streamlining its overall expenses to execute its
international expansion and other efficient client growth
strategies have started showing results. Consequently, number of
accounts of file, a significant revenue driver, has witnessed
spectacular growth in 2011 and so far in 2012.
Financially too, Total System appears sounds with a positive
growth in operating cash flow and capital position. With a current
ratio of 2.0:1.0, at the end of second-quarter 2012, the company
appears well-equipped to meet most of its capital expenditure needs
through internal funds, while also indicating disciplined expense
Healthy liquidity also paves way for returning wealth to
shareholders through dividends and the recently expanded share
buyback program, thereby inculcating confidence for future
However, the global payments industry is intensely competitive
and Total System faces intense competition from data processing,
bankcard computer service firms and third-party software vendors
within the US as well as from international processors and
third-party software vendors. The company's prime competitors
Wright Express Corp.
), while it also faces operating challenges from
Discover Financial Services
Total System is significantly exposed to interest rate risk
associated with the investing of available cash as well as foreign
exchange risk. Moreover, most of the regulatory measures, which
were enacted in the US in July 2011, have already been implemented,
and could contract credit offerings from financial institutions in
Further, the regulations impose numerous costly new compliance
burdens on Total System and its customers, which could lead to
increased service costs and legal compliance costs. Even
management's outlook for top line in 2012, which is 0-2% growth
over 2011, appears stressful. The ongoing global economic
volatility continues to offer ample stress tests to the company,
which would have adverse implications on the margins and sustained
Based on all the pros and cons, the Zacks Consensus Estimate
currently pegs earnings at 32 cents for the third quarter of 2012,
up about 5% 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 #4, which
translates into a short-term Sell rating, while the long-term
Neutral recommendation indicates no clear directional pressure on
the stock in the near term.
BANK OF AMER CP (BAC): Free Stock Analysis
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