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Total System's Inorganic Growth Impress, High Debt a Drag

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On Sep 29, 2016, we  issued an updated research report on Total System Services, Inc. (TSS - Free Report)

The Columbus, GA-based Electronic payment processing and merchant services company is renowned for its outsourced payment services across more than 80 countries. Its offerings include  a broad range of issuer- and acquirer-processing technologies that support consumer-finance, credit, debit, healthcare, loyalty and prepaid services for financial institutions and retail companies.

The company has been undertaking strategic acquisitions and alliances since its inception. The acquisition of ProPay, FNMS, TermNet, Vanguard Payment Systems, and most importantly NetSpend has supported the company in establishing a solid footprint in its industry. Also, partnerships and alliances with big players across all the sectors like Wal-Mart Stores Inc (WMT - Free Report) , RiteAid, Blackhawk Network Holdings, Inc. , CVS, Gap and J. C. Penney Company, Inc. (JCP - Free Report) deserve mention. In 2015, the acquisition of TransFirst positioned the company as the sixth-largest U.S. merchant acquirer and the third-largest integrated payments’ provider. These acquisitions have also strengthened the company’s merchant-acquiring service base, which in turn, resulted in higher sales productivity.

The company has been witnessing robust revenue growth over past few years. The insurer now intends to shed its indirect businesses to focus better on the core business. We note that Total System has raised its full-year 2016 consolidated guidance. The company projects total revenue growth in the range of 50–53% and adjusted EPS growth ranging between 13% and 16% in 2016.

Total System’s strong inorganic growth story is backed by its financial strength and efficient cash flow management. In the first half of 2016, the company witnessed a 37% year-over-year increase in free cash flow. The company has strong solvency that along with its robust cash position help in de-levering its capital structure. Efficient capital management has helped the company in increasing shareholders’ value through several capital deployment strategies.

In spite of the company’s prudent debt servicing capacity, its dependence on high leverage raises caution. If not managed well, this high level of debt can not only drain its bottom line, but also reduce shareholders’ confidence.

The company also faces intense completion in the global payment industry owing to the entry of new players. These new entrants have a competitive edge in terms of pricing strategies due to their smaller scale of operations. The volatile macroeconomic factors, regulatory challenges and sluggish fundamentals are other headwinds.

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