Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies to Research for the Defensive Investor -Â October 2014.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Total System Services Inc. (TSS)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Total System Services, Inc. (TSYS), is a global payment solutions provider that provides services to financial and nonfinancial institutions. The Company operates in three segments: North America Services, International Services and Merchant Services. Through the Companyâ€™s North America Services and International Services segments, TSYS processes information through its cardholder systems to financial institutions throughout the United States and internationally. Its North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Companyâ€™s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. In July 2013, Total System Services Inc completed its acquisition of NetSpend.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$20.80|
|Value Based on 0% Growth||$12.19|
|Market Implied Growth Rate||6.43%|
|Net Current Asset Value (NCAV)||-$7.54|
Balance Sheet – JuneÂ 2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Total System Services is suitable for Enterprising Investors but not for Defensive Investors. Â The Defensive Investor is concerned with the level of earnings growth over the last ten Â years as well as the high PEmg and PB ratios. Â The Enterprising Investor’s only issue is with the level of debt relative to the net current assets. Â As a result, Enterprising Investors followingÂ the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. Â From a valuation side of things,Â the company appears to be overvaluedÂ after growingÂ its EPSmg (normalized earnings) from $1.12 in 2010 to only an estimated $1.43 for 2014. Â This low level of demonstrated growth does not support the market’s implied estimate of 6.43%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Total System Services Inc. (TSS)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Total System Services Inc. (TSS)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.