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Total Systems Services - The Sweet Smell of Plastic

|Includes: Total System Services, Inc. (TSS)
We came across this company quite by accident several days ago at a blog site. Normally we would pass on companies in the financial industry since we simply don't trust their management, believing them for the most part to be liars, cheats, and thieves.

At least that's our opinion of them given the events of the past year or so.

Still, we found ourselves more than a bit intrigued once we came to the conclusion that this company was, in the simplest of terms, just a middleman for the electronic transfer of payments between different types of businesses, meaning they get paid first from by the merchant for receiving the transaction, and then again by the financial institution for sending the transaction.

This sounded like a pretty sweet deal to us, so we invested a bit of our time in hopes that some small understanding of Total Sytems Services, Inc. (NYSE:TSS) might be a pretty sweet deal for us too.

Financial information related to Total Systems Services, contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008 as filed with the with the Securities and Exchange Commission on February 26, 2009.

What They Do
The company provides electronic payment processing and related services to financial and non financial institutions, generally under long-term processing contracts.

Services are provided primarily through the company’s cardholder systems, TS2 and TS1, to financial institutions and other organizations throughout the United States and internationally.

The company offers merchant acquiring services to financial institutions and other organizations mainly through its majority owned subsidiary, GP Network Corporation (GP Net), and its wholly owned subsidiary, TSYS Acquiring Solutions, L.L.C. (TSYS Acquiring).

Due to the somewhat seasonal nature of the credit card industry the company's revenues and results of operations generally increase in the fourth quarter of each year because of increased transaction and authorization volumes during the traditional holiday shopping season.

Growth or declines in card portfolios of existing clients, the conversion of cardholder accounts of new clients to the company’s processing platforms and the loss of cardholder accounts either through purges or deconversions impact the results of operations from period to period.

A significant amount of the company’s revenues are derived from long-term contracts with large clients, including certain major customers. Processing contracts with large clients, representing a significant portion of the company’s total revenues, generally provide for discounts on certain services based on the size and activity of clients’ portfolios.

As a result, electronic payment processing revenues and the related margins are influenced by the client mix relative to the size of client card portfolios, as well as the number and activity of
individual cardholder accounts processed for each client.

According to information we found, the company believes that in fiscal 2008, 42% of the U.S. consumer credit card market was processed on a TSYS system, and that it held an 85% share of the Visa and MasterCard U.S. commercial card processing market in 2008.

The company also believes that TSYS Acquiring is the second-largest processor of merchant accounts and processes transactions for an approximate 27% market share of all bankcard accepting merchant locations in the United States.

Short-Term Investment
The stock is currently in a downtrend, moving toward on overbought condition. Based on a recent close of $14.24 with first resistance at $15.33, an 8% gain from its recent close, and first support at $11.33, a 20% decline from its recent close.

In our opinion, it appears that the stock might be setting up for a short-term rally here, since it appears that the stock could have enough momentum to move past the $15.86 second resistance mark, an 11% move from its recent close, before it finally starts to retrace back toward its recent close.

Long-Term (5 Year Hold) Investment
As we said at the start, we generally are not interested in companies in the financial industry, however we think this stock could be the exception.

While we did not like that goodwill and intangibles made up almost 34% of total assets, we think the rest of the companies financials were impressive.

The company's current ratio, acid test (quick) ratio, and cash ratio were in excess of what we consider investment quality. In addition, the company's free cash flow at $2.05, was also above what we look for in an investment, and the company's return on invested capital number of 50% far exceeds many of the other company's we have reviewed over the past year, another positive investment sign we tend to focus on.

Lastly, we noticed that the company currently has an earnings growth rate of approximately 3%, but believe going forward, this number should increase to something closer to 8%.

Final Thoughts
Our reasonable value estimate for the stock is in the $40-$42 range and based on the company's financial we would be willing to take a position in the stock at current pricing levels, adding to that position on pricing pullbacks.

Considering that the stock pays an annual dividend of $0.28, we think a position in this company will fit very nicely into our portfolio over the longer term.


For the Wax Ink Total System Services Raw Value worksheet, please click here.

Disclosure: No Position