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NYSE:TSS - August 27, 2009 : $15.18

52-week range: $10.36 (Nov. 21, 2008) - $20.45 (Sep. 2, 2008)

Dividend = $0.07 quarterly = 1.84% current yield

TSYS (Total System Services, Inc. (NYSE:TSS)) makes it possible for millions of people to make paperless payments safely and securely. Recognized as the market leader, they provide electronic payment services to financial institutions and companies around the globe. TSS works behind the scenes to offer unmatched flexibility, control and service quality to customers through a broad range of innovative issuing and acquiring payment technologies, including consumer–finance, credit, debit, healthcare, loyalty, prepaid, chip and mobile payments.

The dismal economic conditions caused TSS to suffer a rare dip in earnings per share in 2008. This year looks to be on track for a second year-over-year decline. On balance the numbers don’t look too bad and appear to be fully discounted in the share price.

Here are the per share numbers as reported by Value Line:

Year
Sales
C/F
EPS
*Div.
B/V
Avg. P/E
2002
4.85
1.02
0.64
0.07
3.06
29.1x
2003
5.35
1.22
0.71
0.08
3.72
31.1x
2004
6.03
1.32
0.77
0.14
4.39
30.3x
2005
8.12
1.75
0.99
0.22
5.13
23.6x
2006
9.05
2.20
1.27
0.26
6.17
17.1x
2007
9.08
2.07
1.32
0.28
4.25
22.7x
2008
9.86
2.10
1.30
0.28
5.04
15.4x

* Excludes special dividend of $3.03 /share paid in Dec. 2007

The business is tied to the overall level of credit and debit card transactions so profits should recover nicely once the economy starts expanding again. Value Line notes that TSS has an ‘earnings predictability’ ranking in the 90th percentile (with 100th being best). Standard and Poors assigns TSS a quality rank of ‘A’.

Zacks now sees 2009 – 2010 earnings of $1.12 and $1.21 respectively making the multiple about 13.6x this year’s and < 12.6x next year’s expectations. Those are quite low by historical standards as can be seen with just a glance at the chart above.

With positive comparisons on tap for 2010 I would guess TSS will see a widening of its P/E back to at least around 15x leading me to a conservative 12 – 18 month target price of $18.15 /share. Morningstar agrees. They rate TSS at 4-Stars (out of 5) and see ‘Fair Value’ as $20 /share.

Is that goal price reasonable? I think it may be too conservative. Value Line is using a twenty multiple in figuring their 3-5 year target price range and the lowest annual average P/E of the past decade was the 15.4 multiple set during 2008’s brutal sell-off. TSS actually traded at $22 or better during each year 1998 through 2008. Many of those years saw full year EPS way below current year numbers.

Here’s a six-month play that seems set to deliver excellent returns with just moderate risk.
You can make a fine profit even if the shares do not go up.

Cash Outlay
Cash Inflow
Buy 1000 TSS @ $15.18 /share
$15,180
Sell 10 Feb. $15 calls @ $1.40 /sh.
$1,400
Sell 10 Feb. $15 puts @ $1.20 /sh.
$1,200
Net Cash Out-of-Pocket
$12,580

If TSS merely stays above $15 through the Feb. 19, 2010 expiration date:

  • The $150 calls will be exercised.
  • You will sell your shares for $15,000.
  • The $15 puts will expire worthless.
  • You will have collected $140 in dividends.
  • You will have no further option obligations.
  • You will hold no shares and $15,140 in cash.

That’s a best-case scenario total profit of $2,560/$12,580 = 20.3% achieved in just six months on shares that did not need to rise from the trade’s inception price.

What’s the risk?

If TSS shares finish below $15 on Feb. 19th, 2010:

  • The $15 calls will expire worthless.
  • The $15 puts will be exercised.
  • You will be forced to buy another 1000 TSS.
  • You will need to lay out an additional $15,000 in cash.
  • You will have collected $140 in dividends.
  • You will have no further option obligations.
  • You will end up with 2000 shares of TSS and $140 in cash.

What’s the break-even point on the whole trade?

On the first 1000 shares it’s their $15.18 purchase price less the $1.40 /share call premium = $13.78 /share.

On the ‘put’ shares it’s the $15 strike price less the $1.20 /share put premium = $13.80 /share.

Your break-even would be $13.79 /share (excluding dividends) and $13.09 /share (including yield).

TSS shares could drop by up to $1.39 /share or (-9.1%) without causing a loss on this trade.

Disclosure: Author is long TSS shares and short TSS options.

Source: Total System Services: Swiping Profits