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Total System Stays Neutral

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We have reiterated our Neutral recommendation on Total System Services Inc. (TSS - Free Report) based on its slow but steady operating growth. However, higher expenses weigh on this Zacks Rank #4 (Sell) electronic payment processor.

Why Reiterate?

Total System reported third-quarter 2012 operating earnings of 32 cents per share, which came in line with the Zacks Consensus Estimate and a couple of cents ahead of the year-ago quarter’s earnings of 30 cents per share.Total revenue stood at $468.1 million, up 1.8% year over year and 2.3% on a constant currency basis.

Total System has been witnessing steady growth across international and merchant acquiring services along with improvements in transaction volumes and accounts on file. Moreover, the company has been generating strong capital together with modest improvement in operating cash flow.

With a current ratio of 3.1:1.0 at the end of third-quarter 2012, Total System also appears well-equipped to meet most of its capital expenditure needs through internal funds, while also indicating disciplined expense management. These factors in conjunction with influential long-term contracts have impelled management to aim the higher-end of its guidance in all growth metrics.

However, bleak signs of a radical improvement in the credit profile amid the ongoing economic volatility and regulatory challenges weigh on the strong growth prospects for the top-line expansion.Even management’s outlook for top line in 2012, which is 0–2% growth over 2011, appears stressful.

Additionally, intense competition from data processing, bankcard computer service firms and third-party software vendors also exert pressure on several operational factors such as price, system performance and reliability, breadth of features, functionality, disaster recovery capabilities, business continuity preparedness and data security.

Based on the pros and cons, the Zacks Consensus Estimate for Total System’s fourth quarter 2012 remained unchanged at 33 cents per share over the past 60 days, due to the lack of any estimate revision. This reflects an upside of 5.6% from the year-ago quarter.

Meanwhile, over the past 60 days, the 2012 estimate remained unchanged as well. Consequently, the Zacks Consensus Estimate for 2012 stands at $1.29 per share, up 12.5% over 2011. This estimate lies slightly over the company’s guidance of $1.26–$1.28 per share.

Other Stocks to Consider

While we maintain a neutral stance on Total System, other payment processors such as Heartland Payments Inc. and Equifax Inc. (EFX - Free Report) are worth considering. Both these stocks carry a Zacks Rank #1 (Strong Buy).

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