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Retail Stocks: Playing the new trend in gift giving

Posted December 20, 2007

A Today’s Financial News Research Report: 
This gift card processing company could show investors at quick 35% gain in the first weeks of 2008.

by Ann Sosnowski, Editor, Diligent Investor 

Baltimore (TFN): When Christmas comes along, I make two gift lists.

One is a list of close friends and family and the presents I expect to buy for them. These are the people in my life I know best, so shopping for them isn’t so hard, and I always know they’ll like whatever I buy them anyway.

No time to read? Just listen to the video’s soundtrack.

On the other list are those in my life that will expect me to buy something for them because they’re getting something for me. And it’s not like I don’t want to get anything for them… it’s just that these are the people that I have a hard time shopping for because I feel too forced.

While I do try to personalize each gift, as the holiday comes closer and closer (I have yet to even start my holiday shopping, mind you) and the time crunch hovers and I’m seconds away from tearing my hair out if I have to wrap one more box, I just take the easy route: I buy gift cards. After all, everyone loves picking out gifts for themselves.

In fact, most of the friends I’ve spoken to in the last few weeks say that it’s just easier on everyone that way… and they expect to employ the same strategy to finish off their gift lists.

Nowadays you don’t even have to travel to the actual store to buy their specific gift card. A few years ago, pharmacies and grocery stores started selling a huge array of gift cards for a range of stores, from Home Depot to Borders.

It’s no surprise that a lot of people rely on gift or prepaid cards these days as gifts. In this day and age, it’s a quick fix if you’re busy and in a time crunch.

Retail Stocks: Gift card sales increase on lower (or no) fees

The market is fluttering with such good gift card sales statistics that you can’t help but notice… and wonder how you can take advantage of the trend.

According to Archstone Consulting, customers this holiday season will spend $35 billion on gift cards, an increase of 26% over last year’s sales of $27.8 billion. Taking into account that overall $475 billion will be spent this holiday season by consumers, gift cards will account for a little more than 7% in sales.

The National Retail Federation is being a bit more conservative with their hypothesis: They predict gift card sales of $26.3 billion, up 6% from last year.

Regardless, clearly the general trend for gift card buying is up.

The popularity of gift cards has increased exponentially because of the drop off of fees and expiration dates. In 2003, 60% of retailers had expirations and fees attached to the purchase and general use of cards. Now 18 out of 22 retailers examined by the Office of Consumer Protection had no fees or expiration dates: That translates into only 19% of retailers in that sample having extra rules and rates that apply.

Just think about how many iTunes gift cards are going to be given as gifts this year for those buying new Apple iPods! In fact, 25% of gift cards will be purchased online this year, many of which I bet will come from places like Borders or Apple.

The gift card industry itself has its own appeal. Retailers turn them into funky shapes, put them into CD and DVD packages, design new envelopes for them, or even put them in bags and boxes. They’re treated more as a gift these days instead of a present that says, “I don’t know you that well, but I had to buy you something, so I settled on this.” You can even personalize gift cards these days with a message and a photo!

The play on gift card mania for the holiday season used to be First Data Corp., which formerly traded under the ticker symbol FDC. It was bought out by private equity firm KKR this year. More often than not, First Data Corp. gained pretty well going into the end of the holiday season.

With First Data Corp. now a private entity and not an investment vehicle, I went on the hunt for another company involved in the gift card industry.

And I believe we found a winner…

(Report continues below…)

 
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Retail Stocks: How you can profit

Total Systems Services Inc. (TSS:NYSE) is an electronic payment-processing company that deals with credit cards, as well as “stored value” and retail gift cards.

Total System Services, Inc.
1600 First Avenue
PO Box 1755
Columbus, GA 31902
Phone: 706-649-2262
Fax: 706-644-6081
Web Site: http://www.tsys.com

TSS started in 1959 as a tiny division of Columbus Bank and Trust Company, owned by Synovus, a multi-financial services company with 34 banks and TSS, its card processing company. It became a public company in 1983.

Last year, TSS announced record annual earnings, helped along by a strong fourth quarter in which holiday gift cards were bought in droves.

TSS posted a 75% increase in net income for the fourth quarter of 2006 alone! Its sales for the fourth quarter raked in total revenues of $503.9 million and net income of $87.1 million.

The company supports gift cards from stores like Nordstrom Inc. (JWN:NYSE), Circuit City Stores (CC:NYSE) and also global retail outfits, like a leading Dutch specialty retailer Hunkemoller.

Back in 1999, TSS bought a 40% equity position in Prepaid Technologies LLC, a product development and sales company for prepaid and stored value cards based in Alabama. This has made it a leader in store loyalty and prepaid/stored value cards. This allows TSS to provide not only gift cards to individuals, but employee incentive cards.

TSS’ financials look extremely strong: It boasts more than 15% in profit margin (growing a full 1% since I first noticed it in October), 21.76% in operating margin and has cash of over $592 million compared to debt of only $79 million. (That’s a cash position over 650% more than its debt.)

Additionally, the company has seen fair run-up in loyal shareholders picking up even more stock as TSS announced a special cash dividend of $600 million, as it’s finally spinning off from its parent company Synovus Financial Corp. (SNV:NYSE) to help accelerate growth for both entities. On top of that, TSS shareholders have bought more stock due to TSS’ regular dividend of 20.5 cents, payable in January.

And while the company has released that its net earnings will decrease for the whole of 2007, its net income looks to increase 25% (as opposed to the previously expected 22%) and its revenue will increase 1% instead of a previously expected slight loss.

Currently, TSS is priced around $29 per share, ready to pop above its 200-day Moving Average. Playing TSS due to increased credit transactions on top of gift card purchases over the holiday seems like a safe bet for some quick returns.

TSS chart

TSS popped from the get go in 2007 on good retail sales speculations and then solid numbers for the holiday, moving from $26 per share to $35 by May 2007, a gain of 35%.

I would anticipate a similar move this year on its strong short-term technical picture. Over the course of the next two years, it could represent a good 75% to 100% gain on the spin-off of the company from its parent company, its strong financial stats, and the growing gift and prepaid card industry.

For the holiday season and the projection of $35 billion being spent on gift cards this year, TSS is worth researching for your portfolio.

Buy Total Systems Services Inc. (TSS:NYSE) at its current price. Place a 20% stop loss and target its most recent high of $35 per share as a good exit point for gains.
 


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Posted by Ann Sosnowski · Filed Under Hot Stock Pick of the Week 

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