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Investment idea - Total System

We are upbeat about shares of Total System Services (TSS), a major American provider of processing services for digital payments.

The company released a strong financial report for 3Q15. Revenue rose 14.8% y-o-y to USD 708 mn, outpacing expectations by 5%, while adjusted EPS climbed 39% y-o-y to 78 cents, outstripping the consensus by 10%. Notably, the company’s EPS was on average 10% higher than Wall Street expected over the previous three quarters. Total System generates a significant cash flow, thus allowing the company to buy back shares and pay out dividends. The company spent USD 83.5 mn for buyback and raised quarterly dividend to 10 cents, implying a 0.8% dividend yield. Total System upgraded its financial forecast for 2015. Revenue is expected to increase 11-12% (previous forecast was 10-12%) to USD 2.788-2.746 bn, while adjusted EPS will be up 20-26% (previous forecast was 15-17%) to USD 2.43-2.47.

Total System recently announced an agreement with Google for the use of Android Pay, which aims to improve the reliability, security and ease of contactless payments for customers. Total System is upbeat about the prospects of Android. According to the research of eMarketer, the number of smartphones in the world will exceed 2 bn in 2016 and will account for 51.7% of the total number of cell phones. Use of Android Pay will grow since most of these smartphones will run on Android. The management regards this segment as quite promising and considers it important to gain a foothold in this segment.

We raised our target price for Total System to USD 57 and reiterate a Buy recommendation in the mid-term. The short-term technical target is USD 55.