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Total System’s (TSS) Segmental Growth to Boost Revenues

Zacks

Total System Services, Inc. TSS is poised for strong growth on the back of a healthy U.S. economy and strong consumer confidence on the stock. Driven by this upbeat scenario, the company gets a consistent boost in spending. This should further drive demand for its payment processing, merchant and related payment services amid financial and nonfinancial institutions worldwide.

Through the first nine months of 2018, Total System saw strong organic net revenue growth (up 13% year over year) coupled with an expanded consolidated adjusted EBITDA margin while making additional investments in its people, technology, infrastructure and products.

The company’s Issuer Solutions segment (accounting for 44% of third-quarter net revenues) has delivered a solid performance with an increase in accounts and transaction volumes from the last several quarters. With a sturdy pipeline of new business and product expansion (new products in fraud, data and analytics, digital engagement, customer service, authentication and communications platform), this segment is set to achieve high revenue growth going forward. Moreover, management now expects full-year Issuer growth at the upper end of its prior 5-7% foreign exchange-adjusted growth range.

Another segment of the company — Merchant Solution — is gaining from the acquisitions of Cayan, TransFirst and iMobile3. Growth was also aided by signings of 58 ISO during the first nine months of 2018. Renewal of several large ISV collaborators and roping in more than 35 new integrated partners in the third quarter will further drive growth. The company expects net revenue growth in the 22-24% range for the year while its margin is expected to expand by 50 basis points.


Total System’s Consumer Solutions segment is also firmly placed with more than $8-billion gross dollar volume for the third consecutive quarter in the first nine months of 2018. Management continues to see a strong momentum in deepening its distribution channels while continuing to broaden and investing in underlying technology platform and the overall product suite.

Management expects net revenue growth for the above segment to be in the 7-9% range, up 100 basis points from the previous band of 6-8%. The company also raised its margin expectations for this segment to 23-25% range, up 100 basis points from the past bracket of 22-24%.

Nevertheless, CFPB prepaid rules, which is likely to be effective Apr 1, 2019, will affect the Consumer Solutions net revenues by approximately $60-$65 million with an estimated negative impact on adjustedEPS by 17-19 cents.

In order to dilute the effect of this revenue erosion, the company has taken to business expansion and product diversification strategies. These initiatives are projected to mitigate 1/3-1/2 of the anticipated unfavorable financial impacts of the prepaid rules, both from a revenue and adjusted diluted EPS perspective.

The stock has slid 0.54% in the past six months compared with the industry’s decline of 2.1%. This share price fall provides a good entry point.

Moreover, the stock’s valuation looks attractive with a 12-month forward Price to Earnings (P/E) ratio of 18.5, which is way below its 2-year high range of 16.64-24.9. The figure also compares favorably with the industry average PE/E ratio of 22.4.

Total System carries a Zacks Rank #2 (Buy). Other companies worth considering in the same space include Evertec, Inc. EVTC, WEX Inc. WEX and Green Dot Corporation GDOT. While Green Dot sports a Zacks Rank #1 (Strong Buy), the other two stocks hold the same top Zacks Rank of 2 as Total System.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Each of the above companies surpassed the respective consensus estimate in all the trailing four reported quarters, the average positive surprise being 17%, 3.3% and 18.4%, respectively.

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