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On Oct 15, we downgraded electronic payment processing and merchant acquiring services provider – Total System Services Inc. (TSS - Analyst Report) – to Neutral based on its latest acquisition and raised financial prospects, partially offset by higher expenses and financial leverage.

Why the Downgrade?

Estimates of Total System have remained stable ahead of its third-quarter 2013 results, which are scheduled to be released after the closing bell on Oct 22. In the last 30 days, the Zacks Consensus Estimate for 2013 remained at $1.61 per share, while that for 2014 rose by a penny to $1.95 a share.

Nonetheless, the current estimates reflect 25% year-over-year growth in 2013 and 21.2% upsurge in 2014. With the Zacks Consensus Estimate for both 2013 and 2014 rising steadily, the company now has a Zacks Rank #2 (Buy).

On Jul 23, Total System reported second-quarter 2013 operating earnings per share of 34 cents, which beat the Zacks Consensus Estimate by a penny but fell short of the year-ago number by a cent. However, the Zacks Consensus Estimate for third-quarter 2013 is pegged at 45 cents per share, which is expected to escalate 39.4% over the prior-year quarter.

Total System’s recent NetSpend acquisition is expected to draw incremental operating leverage and core synergies. This is also reflected by the significant rise in guidance. Conversely, the acquisition has also amplified financial risk from higher expenses and increased debt, raising caution over margins’ growth in the near term.

Overall, we believe Total System should benefit from a healthy impact of the regulations, which should further help recover client accounts and augment long-term contracts, thereby instilling shareholder confidence. Moreover, strategic acquisitions, alliances and technical competence are expected to consistently drive long-term growth.

Other Financial Stocks That Warrant a Look

While Total System slight improvement over the near term, other outperformers in the financial sector including MasterCard Inc. (MA - Analyst Report), XOOM Corp. (XOOM - Snapshot Report) and Visa Inc. (V - Analyst Report), each carrying a Zacks Rank #2 (Buy), appear impressive.

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