DST's Q3 Earnings to Gain From Financial Services & Buyouts

DST Systems Inc. DST is scheduled to report third-quarter 2017 earnings on Oct 20.

We expect DST Systems to perform well driven by strength in its Financial Services segment and synergies from acquisitions. Continued share buybacks and dividend payments are the other encouraging factors.

The company’s shares are moving in the upward direction of late. Notably, its shares have returned 7.4% in the past one month, outperforming the industry’s gain of just 2.5%.

Financial Service Segment to Drive Growth

In second-quarter 2017, DST Systems’ Domestic Financial Services operating revenues (excluding out-of-the-pocket reimbursements) rose 22.9% year over year and came in at $312 million. Benefits from businesses acquired from Boston Financial Data Services, Inc. ("BFDS") in 2017 and increased revenues from organic growth along with positive market movement at ALPS positively impacted the segment.

International Financial Services Segment increased from $31.2 million reported in the year-ago quarter to $231.1 million, primarily owing to synergies from International Financial Data Services Limited ("IFDS U.K.") acquisition.

We believe that Financial Services’ revenues will grow in the upcoming quarters primarily backed by significant contributions from the acquisitions of, Kaufman, Red Rocks Capital, ALPS, IntelliSource, Subserveo and Finix.

Important Developments of 2017

DST Systems announced the completion of the acquisition of State Street's ownership interest in both BFDS and IFDS U.K. We believe that these acquisitions will be accretive to DST Systems’ earnings and will have a positive impact on the to-be-reported quarter.

The company also has a strong business model. It generates recurring revenues and a good percentage of its business comes from long-term contracts with its customers. The company has developed the fee structure on a per-account and per-transaction basis, which indicates the fixed and flexible portion of revenues with respect to each client. Financial services companies that use DST System’s software to service multiple such clients generate incremental revenues with each additional client and/or transaction. The model ensures a minimum revenue level even when there are limited transactions.

Meanwhile, persistent decline in registered accounts, ongoing consolidation in the U.S. financial services market and stiff competition from International Business Machines Corporation IBM and Fiserv Inc. FISV might put its fundamentals under pressure. Moreover, a high-debt burden remains a major concern.

Currently, DST Systems carries a Zacks Rank #3 (Hold). Another top-ranked stock worth considering in the broader technology industry is Applied Materials, Inc. AMAT, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Materials has an expected long-term EPS growth rate of 17.1%.

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