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Alliance Data Systems (ADS)
This is an interesting situation given the disastrous run from a $300+ stock in 2015 to just over $100 today while the S&P 500 has had stellar returns during that period. Year-to-date, shares are down nearly 30% for this $5bn company.
Before jumping into what’s gone wrong. ADS consists of 2 businesses: loyalty program management (mostly air miles in Canada) and private label / co-branded credit cards for retailers (known as Card Services).
ADS has had a lot going on:
Recently sold their struggling marketing services division
Got themselves a new CEO
Bought back a boatload of stock (at prices higher than today’s),
Declining earnings from higher bad debts and loan portfolio cleanup, and
Lowered guidance a few times throughout the year
Throw in the exposure to brick and mortar retailers (their largest private label credit card customer, L Brands, has been facing its own revenue declines) and generally close to subprime consumer credit, and you get a recipe for weak shares.
On the bright side…
This is a cheap stock despite the lower guidance.
Earnings are down as the company builds reserves for loan growth and with the divestiture, they’re unable to offset the earnings with debt paydown and stock buybacks right out of the gate (though these will help). EPS should come in around $17 per share in 2019 according to management before rebounding 20%+ in 2020.
At today’s $107 price tag, that puts ADS at 6.3x this year earnings and 5.3x next year.
In addition, management has been making some decent moves. Since the start of 2018, they’ve repaid $5.2bn in debt and securitizations, repurchased nearly $1.5bn in stock, and funded another $3.5bn in new loans. This $10bn in cash spent came from $4.3bn in operating cash flow, another $4.3bn from the business sale, $1.2bn raised from selling bad loans, and $1.6bn in deposits from their consumer banking products. That’s a fairly healthy sources and uses of cash flow despite the headlines.
This is also a business that held up remarkably well during the 2008-2009 financial crisis. They even had a penchant for repurchasing shares near the bottom in stock prices.
If management continues to focus on improving the balance sheet while growing the core Card Services business, today’s stock price looks pretty good…