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Total Systems Services - The Sweet Smell of Plastic

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February 26, 2010 – Comments (5) | RELATED TICKERS: 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.

Basis
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.

Wax

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

5 Comments – Post Your Own

#1) On February 26, 2010 at 10:07 PM, malq (< 20) wrote:

Everything to do with future of a stock or a company is not only the way the numbers or industry is analysed. TSYS is an example here. Apart from the rather high value given to unknown assets, there is also the simple fact that this company has no real exposure or success with commerce or business outside North America. In addition, as an ex-employee, I know up-close the fiscal ir-regularities that seem to be prevalent. Most recently, a few days ago, Robert Philbin, the CEO of their Acquiring business (TSYS AS) was asked to take a walk for reasons not really explained but quite well known. I myself chose to quit rather than continue with the over-invoicing fake payment culture that seems to exist from bottom to top at TSYS.I would not bet on this share too much. Too close to the episode involving Global Cash, if you look at the linkage there too.

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#2) On February 27, 2010 at 7:20 AM, wax (97.04) wrote:

Malq;

It is good of you to share your insights about the company, they are much appreciated.

Please keep in mind that the idea with our posts is to present information in such a fashion so not only does the reader understand some of the things we look for in an investment, but is also motivated to do their own research.

Our valuations are exactly as we said, reasonable value estimates. We have no idea how others will view the stock, we are simply trying to provide a starting point from which those interested can begin their own research.

Information such as you provided in your post is invaluable when researching a stock since it should make those considering the stock for investment want to dig deeper in an effort to verify the information you provided.

Wax

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#3) On February 28, 2010 at 6:45 AM, malq (< 20) wrote:

Thank you, Wax, for your kind response. Here's mine:-

The payment processing industry has moved way way beyond anything that TSYS can even dream of providing. TSYS just does not have the skillsets and nimbleness required to keep up with the rapidly changing scenario internationally. This was a business traditionally dominated in the US by sheer size and presence as well as lobbying - the rules have now totally changed.

Next, there are major issues with due diligences within the company, especially as pertain to audits and expenses - my own departure from TSYS was because I refused to pad expenses and pass inflated bills, choosing to take up other options. TSYS issues pertaining to a wide range of corporate escapades are now up in the Delhi High Court, since they involve corporate adherences, and will need to be explained as well as resolved.

In addition, the sudden departure of Robert "Bob" Philbin from TSYS Acquiring Services, has to be explained to stakeholders - and this is not being done. There is no smoke without fire, and the loud but true buzz of audit, accounting and other fiduciary irregularities surrounding him and other key players will sooner rather than later need to be explained to the authorities as well as others. This is a major risk to the parent company.

Finally, they have a very badly mismanaged lay-off programme underway, mainly in Columbus-GA and Tempe/Phoenix-AZ, and the whole concept of management by fear is going to bounce back on the company globally.

"Liars, cheats and thieves", certainly. In addition, fence that eats the crop may be another matter. Take a look at what the bosses give themselves, in addition to stock options, salaries, the works, if they get laid off:-

http://216.139.227.101/interactive/tss2009proxy/pf/page_039.pdf
Philip W. Tomlinson/$ 9,628,575
James B. Lipham/$ 3,644,207
M. Troy Woods/$ 7,883,336
William A. Pruett/$ 4,120,725
Kenneth L. Tye/$ 4,827,824 

TSYS is in deep trouble. They have not invested in technology or in people. That, unfortunately, does not really show up on the balance-sheet.

 

 

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#4) On February 28, 2010 at 1:04 PM, wax (97.04) wrote:

malq;

Thank you for your added response.

Please bear in mind that we do not recommend stocks for investment. The idea is to let folks know what we have found, and hopefully with additional research and information of the type you have included in your replies, determine if an investment in the company would hold any value for them.

We higlighted the company because we found some discussion regarding it on the web. The initial research we conducted led us to believe that indepth research may be of value.

Further, we hope that investors will take the time to read through all of the company SEC filings, since doing so should reveal that the information you posted was filed in the company's most recent DEF 14.

Again, thank you for highlighting areas for future research for readers of this blog. I know we have found it to be very eye opening.

Wax

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#5) On March 08, 2010 at 4:55 AM, wax (97.04) wrote:

Followers of the company may already be aware of this, but for those of you that are not, here you go.

Total System Services, Inc. under Investigation over possible Securities Laws violations

Wax

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