On Sep 4, 2013, we upgraded electronic payment processing and
merchant acquiring services provider -
Total System Services Inc.
) 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 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
Official Payments Holdings Inc.
) carrying a Zacks Rank #2 (Buy) also appear impressive.
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