Is Total System Services, Inc. (NYSE:TSS) Undervalued After Accounting For Its Future Growth?

Total System Services, Inc. (NYSE:TSS) is considered a high-growth stock, but its last closing price of $100.54 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Below I will be talking through a basic metric which will help answer this question.

See our latest analysis for Total System Services

Has the TSS train has slowed down?

Analysts are predicting good growth prospects for Total System Services over the next couple of years. The consensus forecast from 23 analysts is bullish with earnings per share estimated to surge from current levels of $3.17 to $4.826 over the next three years. On average, this leads to a growth rate of 13% each year, which indicates a solid future in the near term.

Can TSS’s share price be justified by its earnings growth?

Total System Services is trading at price-to-earnings (PE) ratio of 31.72x, this tells us the stock is overvalued compared to the US market average ratio of 18.17x , and undervalued based on its latest annual earnings update compared to the IT average of 31.72x .

NYSE:TSS Price Estimation Relative to Market, April 20th 2019
NYSE:TSS Price Estimation Relative to Market, April 20th 2019

Total System Services’s price-to-earnings ratio stands at 31.72x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, to properly examine the value of a high-growth stock such as Total System Services, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 31.72x and expected year-on-year earnings growth of 13% give Total System Services a quite high PEG ratio of 2.47x. This means that, when we account for Total System Services’s growth, the stock can be viewed as overvalued , based on the fundamentals.

What this means for you:

TSS’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are TSS’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has TSS been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TSS’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.