Visa Inc. (NYSE:V) shares are up more than 46.56% this year and recently increased 0.29% or $0.33 to settle at $114.35. Total System Services, Inc. (NYSE:TSS), on the other hand, is up 62.55% year to date as of 12/27/2017. It currently trades at $79.70 and has returned -0.36% during the past week.
Visa Inc. (NYSE:V) and Total System Services, Inc. (NYSE:TSS) are the two most active stocks in the Credit Services industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect V to grow earnings at a 16.62% annual rate over the next 5 years. Comparatively, TSS is expected to grow at a 12.31% annual rate. All else equal, V’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 20.54% for Total System Services, Inc. (TSS). V’s ROI is 15.70% while TSS has a ROI of 7.50%. The interpretation is that V’s business generates a higher return on investment than TSS’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. V’s free cash flow (“FCF”) per share for the trailing twelve months was +0.92. Comparatively, TSS’s free cash flow per share was +1.17. On a percent-of-sales basis, V’s free cash flow was 10.38% while TSS converted 5.16% of its revenues into cash flow. This means that, for a given level of sales, V is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. V has a current ratio of 1.90 compared to 1.00 for TSS. This means that V can more easily cover its most immediate liabilities over the next twelve months. V’s debt-to-equity ratio is 0.67 versus a D/E of 1.26 for TSS. TSS is therefore the more solvent of the two companies, and has lower financial risk.
V trades at a forward P/E of 24.07, a P/B of 9.54, and a P/S of 14.08, compared to a forward P/E of 21.58, a P/B of 6.22, and a P/S of 3.06 for TSS. V is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. V is currently priced at a -7.62% to its one-year price target of 123.78. Comparatively, TSS is 0.03% relative to its price target of 79.68. This suggests that V is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for V and 2.30 for TSS, which implies that analysts are more bullish on the outlook for TSS.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. V has a beta of 0.97 and TSS’s beta is 1.11. V’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. V has a short ratio of 4.10 compared to a short interest of 2.15 for TSS. This implies that the market is currently less bearish on the outlook for TSS.
Visa Inc. (NYSE:V) beats Total System Services, Inc. (NYSE:TSS) on a total of 9 of the 14 factors compared between the two stocks. V is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. V is more undervalued relative to its price target. Finally, MA has better sentiment signals based on short interest.