Despite the revised analyst estimates that we are seeing this earnings season, most companies are still having great difficulty exceeding these dramatically lowered estimates.  As a result, momentum stocks like Twitter (TWTR) and Tesla (TSLA) are getting slaughtered.  Many investors who bought these stocks are getting a firsthand education in the laws of gravity, racking up serious losses as part of their tuition.  Momentum investors often make the mistake of not determining the price to free cash flow  for each company before they make a purchase.  Since they have little idea as to what they are really buying going in, and do little if any due diligence, they usually end up losing a considerable amount of their investment when they attempt to sell and find no buyers.

After glancing at the following tables, you may be left wondering as to what these momentum players were thinking.

----------------------------------------------------------------------------------------------------------------------------------

For those of you who are unfamiliar with the type of analysis we do at Conservative Equity Investment Advisors, I encourage you to read an introduction by going here.

With all the attention being paid to momentum stocks, many highly profitable and well-managed companies are falling off the radar and are being overlooked. Three companies that we recently bought for our clients can be found in the Payment/Loyalty Solution Providers industry.  Here they are with with each company’s free cash flow analysis.

Vantiv, Inc.(VNTV) provides electronic integrated payment processing services in the United States. It operates in two segments, Merchant Services and Financial Institution Services. 

The Merchant Services segment offers integrated acquiring and processing transactions, value-added services, and merchant services for banks and credit unions. This segment also authorizes, clears, settles, and provides reporting for electronic payment transactions for its merchant services clients. It serves national retailers and small to mid-sized business clients in industries, such as grocery, pharmacy, retail, petroleum, and restaurants/quick service restaurants.The Financial Institution Services segment provides integrated card issuer processing, payment network processing, fraud protection, card production, prepaid program management, automated teller machine driving, and network gateway and switching services. This segments integrated card issuer and processing services include statement production, collections, and inbound/outbound call centers for credit transactions; and other services, such as card portfolio analytics, program strategy and support, fraud and security management, and chargeback and dispute services. It also offers prepaid card solutions, such as incentive, rebate and reward programs, general purpose reloadable cards, and gift cards, as well as merchant services. This segment serves financial institutions, including regional banks, community banks, credit unions, and regional personal identification number networks. Vantiv, Inc. sells its services through a national sales force, regional and mid-market sales teams, and a telesales operation.

Here is an recent interview with the CEO which will give you a better idea of what they do:     http://video.cnbc.com/gallery/?video=3000275350 

Total System Services, Inc.(TSS) provides electronic payment processing services to banks and other financial institutions in the United States and internationally. It operates through four segments: North America Services, Merchant Services, International Services, and NetSpend. The company offers issuer account and card solutions, including processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution, and accumulating the accounts transactions; fraud management services for monitoring the unauthorized use of accounts; fraud detection systems for identifying fraudulent transactions; and other services, such as customized communications to cardholders, information verification associated with granting credit, debt collection, and customer service. It also provides processing services, acquiring solutions, related systems, and integrated support services, which include processing various payment forms comprising credit, debit, prepaid, electronic benefit transfer, and electronic check; authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; merchant billing services; and point-of-sale equipment sales and service. In addition, the company issues general purpose reloadable and payroll cards, as well as offers alternative financial services to underbanked consumers in the United States; and transaction processing, disaster recovery, and other services for banks and bankcard issuers in China. Total System Services, Inc. provides its services through online accounting and electronic payment processing systems.

Alliance Data Systems Corporation (ADS) provides marketing and loyalty solutions in the United States, Canada, and other countries. The company facilitates and manages interactions between its clients and their customers through various consumer marketing channels, including in-store, online, catalog, mail, telephone, email, mobile, and social media. It operates through three segments: LoyaltyOne, Epsilon, and Private Label Services and Credit. The LoyaltyOne segment owns and operates the AIR MILES Reward Program, a coalition loyalty program. This segment also offers loyalty services, such as loyalty consulting, customer analytics, and creative services. The Epsilon segment provides integrated direct marketing solutions that leverage transactional data to help clients acquire and build relationships with its customers. Its services include strategic consulting, customer database technologies, permission-based email marketing, loyalty management, proprietary data, predictive modeling, and direct and digital agency services. This segment’s marketing services comprise agency, database design and management, data, analytical, and traditional and digital communications. The Private Label Services and Credit segment offers credit card processing, billing and payment processing, customer care, and collections services for private label retailers, as well as private label retail credit card and loan receivables financing, including securitization of the credit card receivables that it underwrites from its private label retail credit card programs. This segment also provides marketing services, including designing and implementing strategies that assist its clients in acquiring, retaining, and managing repeat customers. It serves financial services, specialty retail, grocery and drugstore chains, petroleum retail, automotive, hospitality and travel, telecommunications, and pharmaceutical markets.

In conclusion, when factoring in our buy prices for these three firms we only used a 5% free cash flow growth rate in using our Two Stage Dividend Discount model.  Therefore, as always our margin of safety is very conservative.  We have also analyzed each company’s management using Philip A. Fisher’s “15 Points” from his qualitative analysis masterpiece “Common Stocks and Uncommon Profits” and they each came up with very high scores.  Those “15 Points” can be viewed by going HERE.  When you put all the pieces together you have three stocks with elite management at the helm in a high growth industry with a bright future, selling at amazing valuations.  Momentum stock investors are overlooking this industry right now as its players are not household names, but very soon the momentum crowd may show up once they discover how lucrative the margins are, and then we, as early investors, will be well rewarded for our due diligence.