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On February 13, we reiterated our Neutral recommendation on Total System Services Inc. (TSS - Analyst Report) based on the company’s fourth quarter results and a fair guidance for 2013. However, increasing operating expenses amid intense competition pose some risk on the operating leverage.

Why the Reiteration?

Estimates have remained stagnant for this electronic payment service provider since it reported the fourth quarter results on January 22. Operating earnings of 32 cents per share were a penny below the Zacks Consensus Estimate and 3.4% higher than the year-ago quarter’s earnings of 31 cents per share.

Total revenues for the reported quarter were $479.1 million, up 1.5% year over year but lagged the Zacks Consensus Estimate of $484.0 million. Nevertheless, management’s top line expectation of 5–7% and low double-digit earnings growth outlook for 2013 validate a slow but steady growth momentum.

Following the fourth quarter results, the Zacks Consensus Estimate for 2013 and 2014 have been maintained at $1.44 per share and $1.64 a share, respectively. With the Zacks Consensus Estimates showing a slight upward pressure on the stock from 2013 to 2014, the company now has a Zacks Rank #2 (Buy).

A Neutral Approach

Total System’s top and bottom line have improved modestly in the past 2 years. The company’s risk-free balance sheet along with modest liquidity provides viable scope for healthy capital deployment.

Also, its pipeline of international opportunities and improvement in client activity should help stimulate above-average growth and higher accounts on file. The high profile long-term acquiring services and technology contracts with leading global organizations will continue to boost its business portfolio and top-line growth. An optimistic guidance for 2013 further raises confidence and supports a long-term growth momentum.

While we believe that the worst is over for this company, escalated expenses tend to outpace top-line growth, thereby limiting the desired upside in margins. Alongside, a higher backlog of accounts and risks related to intense competition, interest rates and foreign exchange fluctuation create a challenging operating environment for the company.

Other Stocks to Consider

While we continue to monitor the future developments of Total System, other stocks in the financial sector that are performing well include Visa Inc. (V - Analyst Report), Global Payments Inc. (GPN - Snapshot Report) and Fiserv Inc. (FISV - Analyst Report). All of these carry a Zacks Rank #2 (Buy).

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