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Analyst Blog

On Jul 11, we issued an updated research report on Total System Services Inc. (TSS - Analyst Report). The company’s diversified and restructured portfolio, strong network alliances, strategic acquisitions and technical competence augur long-term growth.

This Zacks Rank #2 (Buy) stock delivered positive earnings surprises in 2 all the last 4 quarters. Moreover, the company’s first-quarter 2014 earnings topped the year-ago quarter figure by about 3%, though it missed the Zacks Consensus Estimate by about 5%.

Nevertheless, the ongoing market recovery is reinstating the confidence of consumers, which in turn is leading to an improvement in client activity. This is reflected in strong double-digit growth within accounts on file in the past several quarters. Growth of new clients and retention of the existing ones, across sectors, are reaping positive results for the company.

Moreover, Total System’s strategy of diversifying through significant acquisitions have been commendable. While NetSpend has enabled entry into the prepaid card market, the previous acquisitions of FNMS, TermNet and Vanguard Payment Systems have bolstered the company’s merchant acquiring portfolio. The acquisitions of ProPay and a 75% stake in CPay are further brightening Total System’s growth prospects within the small, medium and micro-merchants’ market.

Overall, total acquisitions contributed 2.9% to top-line growth in 2011, 1.8% in 2012 and a significant 16.7% in 2013. Management expects further strengthening of the financials in 2014 and beyond, perking up growth as well.  Improved cash flows also indicate timely reduction of debt, paving the way for higher shareholder return.

Near-Term Risks

Even amid efforts to consolidate its business and enhance operating leverage, Total System’s margins are likely to be impacted by increased price competition (particularly within the merchant acquiring segment), regulatory challenges, exposure to interest rate, foreign exchange volatility and a tepid earnings guidance in the near future.

Overall, a balanced risk-reward propositionin the near term has led to estimates hitting a plateau for 2014 and 2015. As a result, the Zacks Consensus Estimate for 2014 and 2015 remained intact at $1.74 and $2.02 per share, respectively, in the last 30 days. On a year-over-year basis, earnings are expected to increase 8.8% in 2014 and 15.6% in 2015.

Key Picks in the Sector

Other stocks that look promising in the financial sector include Visa Inc. (V - Analyst Report), Fiserv Inc. (FISV - Analyst Report) and Vantiv Inc. (VNTV - Snapshot Report). All of these stocks carry the same Zacks Rank as Total System.

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