Recently, Fool contributor Sean Williams featured three stocks in an article which might be potential targets of legendary investor Warren Buffett. Out of the three stocks, there was one payment business, Total System Services, Inc. (NYSE:TSS). Since the middle of June, Total System has advanced from $22.60 per share to more than $25.20 per share. Should investors invest in Total System at its current trading price? Let’s take a look.
A cash cow with high goodwill and intangible assets
Total System Services, Inc. (NYSE:TSS) is the global provider of payment solutions to both financial and non-financial institutions operating in three main segments: North American Services, International Services, and Merchant Services. Around $287.6 million, or 80% of the total operating income, was generated from the North American Services segment. While Merchant Services ranked second with $132.1 million in income, International Services contributed only $27.33 million in operating profit.
What I like about the company is its consistent revenue growth in the past four years and consistent positive operating and free cash flow. Revenue has increased from $1.67 billion in 2009 to $1.87 billion in 2012 while net profit has fluctuated in the range of $194 million to $244 million during the same period. In 2012, its operating cash flow came in at $456 million while free cash flow was $338 million.
Moreover, Total System Services, Inc. (NYSE:TSS) employs quite a conservative capital structure. As of March 2013, it had $1.45 billion in equity, $223 million in cash, and nearly $200 million in debt. However, it also has a large amount of goodwill and intangible assets of more than $1 billion. Thus, the tangible book value was around $450 million only.
Acquiring a prepaid debit card business at a high valuation
Earlier in July, Total System Services, Inc. (NYSE:TSS) closed the acquisition of prepaid debit card provider NetSpend Holdings Inc (NASDAQ:NTSP). By acquiring NetSpend, Total System can enter a rapidly growing prepaid market which was estimated to double in the next four to five years. Moreover, it could not only enlarge its customer base, including corporate customers and government agencies, but also leverage NetSpend’s distribution network and products.
However, Total System Services, Inc. (NYSE:TSS) trades at a high valuation of 13.6 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization), more expensive than the current valuation of DFC Global Corp (NASDAQ:DLLR). DFC Global, at $14.40 per share, is worth $583.9 million. The market values DFC Global at only 4.56 times its trailing EBITDA.
Another peer, Cash America International, Inc. (NYSE:CSH), also has quite a lower EBITDA multiple. Cash America is trading at $47.90 per share with a total market cap of $1.37 billion. It is valued at only 5.3 times its trailing EBITDA. Among these businesses, Total System Services, Inc. (NYSE:TSS) is the most expensively valued. It is trading around $25.15 per share with a total market cap of $4.7 billion. The market values Total System at more than 10 times its trailing EBITDA.
Both DFC Global and Cash America modified full year 2013 guidance
DFC Global Corp (NASDAQ:DLLR) is an international financial service provider, mainly for unbanked and under-banked consumers and small businesses, including ALICE (Asset Limited, Income Constrained, Employed) and ARTI (Asset Rich, Temporarily Illiquid).
Around 50.2% of its total revenue in the third quarter was derived from the U.K., while Canada and the U.S. ranked second and third, accounting for 28.7% and 12%, respectively, of the total revenue. For the full year 2013, the company reduced its EPS guidance from $2.35-$2.45 per share to only $1.70-$1.80 per share.
Cash America International, Inc. (NYSE:CSH) is the biggest pawn lender in the world, with 828 lending locations in 22 states in the U.S. and around 47 pawnshops in Mexico. It seems to have a high quality loan portfolio as 70% of its pawn loan portfolio was secured by jewelry, and it has a 67% redemption rate and realized around 150% yield on merchandise sold in 2012.