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Will Total System (TSS) Q2 Earnings Surprise This Season?

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Global electronic payment processor – Total System Services Inc. (TSS - Free Report) is scheduled to release second-quarter 2014 financial results after the closing bell on Jul 22.

In the last reported quarter, the company delivered a negative earnings surprise of 12.5%, while the four-quarter trailing average miss is pegged at 2.4%. Let's see how things are shaping up for this announcement.

Factors Affecting Results

Total System’s core diversified product portfolio stands to gain in peer group. Strategic acquisitions, strong alliances and technology upgrades further cushion the core growth, reaping positive results. This is reflected in double-digit growth in transaction volumes as well as improved new accounts and cash flows.

Notably, the acquisition of NetSpend in Jul 2013 added to the 16.7% contribution to total top-line growth from acquisitions in 2013, up from 1.8% in 2012, while also recording over 20% growth in direct deposit active cards and gross dollar volumes (GDV) in 2013 and first-quarter 2014. The benefits of integrating NetSpend is also reflected in the company’s modest top-line and adjusted EBITDA guidance of 17–20% in 2014, both up from the 2013-levels.

Conversely, the acquisition has increased the operating expenses and borrowing costs due to the debt raised to fund it. Moreover, risks from higher expenses, debt, currency fluctuations, discontinued operations in Japan and minimal synergies from NetSpend continue to linger.

These factors have not only deterred share buybacks and margins’ expansion, as witnessed in the past few quarters, but also impelled management to project operating earnings per share of 10–12% in 2014. The guidance is noticeably lower than 18% growth recorded in 2013.

We believe that the timely reduction in debt will likely support efficient capital deployment going forward. However, the company’s financial performance in the second quarter and guidance revision, if any, will give a clearer picture of Total System’s future. Therefore, at present, we would like to stay at the periphery regarding the stock.

Earnings Whispers

Our proven model shows that Total System is not likely to beat earnings as it lacks the required combination of two key components.

Zacks ESP: The Most Accurate estimate of 41 cents per share is at par with the Zacks Consensus Estimate of Total System. Hence, the Expected Surprise Prediction or Earnings ESP, which is the difference between the aforementioned estimates,is 0.00%.

Zacks Rank: Total System has a Zacks Rank #2 (Buy). Note that stocks with Zacks Rank #1, 2 and 3 have significantly higher chances of beating earnings. Sell-rated stocks (#4 and 5) should never be considered going into the earnings announcement. 

The combination of Total System’s Zacks Rank #2 and nil ESP deter us from making a conclusive prediction.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter: 

Everest Re Group Ltd. (RE - Free Report) has earnings ESP of +11.8% and a Zacks Rank #2 (Buy).

Visa Inc. (V - Free Report) has earnings ESP of +1.0% and a Zacks Rank #2 (Buy).

Moody’s Corp. (MCO - Free Report) has earnings ESP of +3.1% and a Zacks Rank #3 (Hold).

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