TSS - Total System Services

**dchamber** Mon Feb 06, 2006 11:30 am

TSS - Total System Services
What do you think about TSS?

It’s trading now at 19.8 and I think we should be able to get an 18% average annual gain over 10 years.

Here is my reasoning. Please critique it.

They seem to be a financially sound company with good growth of both book and shareholders equity.

They have a current ratio of 2.1 which is better than my target of 2 and much better than the industry average of 1.4.

They have never dropped below a 15% ROE and the average for 10 years is just over 20%.

Their book value has increased an average of 21.5% a year since 19.95 and has never had a decline from year to year.

Their current P/E is 20.7 which is lower that the industry average of 35.7 and is lower than the lowest average annual P/E they have had in 10 years, which was 29.1. This value is also much lower than their 10 year average P/E which is 46.

Analysts estimate their EPS growth rate at 14.9% and with an actual EPS growth rate over the last 10 years of more than 20% this seems reasonable.
The value line EPS growth rate is estimated at 11% so I’ll use this number but it’s a lot lower than other analysts predicts. I like to err on the low side for EPS estimated.

If they can increase earnings 11% a year for 10 years and trade at their average P/E in 10 years that would give us a share price of $128. This average P/E of 46 seems very high to me so I’ll substitute their industry average of 35.7 which gives a price of about $100/share.

With a current dividend yield of 1.1% I should expect to earn another $7 per share in dividends each year. So I will set a 10 year target around $107 per share.

I’ve built in a lot of cushion here by using such a low growth rate (11% vs. the analysts 14.9%). Also, I usually use the average P/E when forecasting future prices but since it was so high I used the much lower industry average of 35.

I’m not sure what to think about these high P/Es. Their history and the industry seems to support it but it is still a little high for me. What do you think?

**blast_investor** Mon Feb 06, 2006 12:09 pm

Hi dchamber,

Although I am not investing into this type of stocks, I like TSS's business model. TSS is growth oriented Warren Buffet type stock. TSS valuation is also not very expensive. TSS business model has consumer manopoly power and high barrier to entry.

You also might want to look into FDC, First Data, a competitor of TSS. First Data is Warren Buffet stock. First Data also has similar valuation as TSS's.

Personally I would favor FDC over TSS not just because of Warren Buffet.

In analyzing business model of TSS or FDC, size and brand is very important. In this business, FDC is much more dominant, FDC also has brand name business line like Western Union division.

I would not like to use Wall Street analysts' number as basis. I do not believe they can predict long term growth prospect of a business correctly. I would focus my research on business advantage, and barrier to entry. For example, why did TSS lose Bank of America business recently? Did that indicate degradation of durable competitive advantage?

Going along with Warren Buffet is usually not bad idea, particularly FDC is not a more expensitve company and FDC has much more dominant business and better brand name.

**blast_investor** Mon Feb 06, 2006 12:49 pm

By the way, for a stock like TSS, durable competitive advantage is everything.

Once a company lost durable competitive advantage for various reasons, the margin will shrink dramatically and earning growth will go down hell.