Alliance Targets The Best Customers

12/26/2011


  Recent Price
$105
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
14
  Shares (millions)
59
  Long-Term Debts as % of Capital
97%
  52-Week Price Range
$107.33 - $69.67

Globally, companies pour about $400 billion into marketing and advertising every year. Within that fast-growing market, Alliance Data Systems ($105; ADS) sees marketing budgets shifting toward its sweet spot: programs driven by data and deployed over multiple channels. Alliance helps clients — a broad base of more than 900 customers including AstraZeneca ($46; AZN), Bank of America ($5; BAC), and Hilton — tune their pitches for digital marketing campaigns disseminated via e-mail, social media, and Web sites.

Alliance's operating results reflect these favorable trends, with sales climbing at double-digit rates in seven straight quarters and operating cash flow up in all but one of those quarters. The stock is a Focus List Buy and a Long-Term Buy.

Business breakdown              

Alliance's three business segments each grew revenue at least 7% in the first nine months of 2011.

The biggest unit issues private-label credit cards and designs marketing strategies based on consumer-spending patterns (48% of revenue for nine months ended September and 71% of operating income). Alliance helps specialty retailers gain a competitive advantage by identifying loyal customers who make more frequent transactions. So far this year, the business unit has added six new clients.

LoyaltyOne (27%, 21%) promotes marketing programs and services that seek to alter customer behavior. Alliance's AIR MILES Reward Program, the largest loyalty program in Canada, lets shoppers redeem points for travel and other rewards. In the nine months ended September, the program issued 7% more reward miles than it did in the year-earlier period.

Epsilon (25%, 8%) helps customers design and evaluate marketing programs. Earlier this year, the Epsilon unit won contracts with Kellogg ($49; K) and Norwegian Cruise Line. In 2012, Alliance expects Epsilon to deliver double-digit growth in revenue and operating income.

The company's business model requires little capital spending to drive growth. Alliance's free cash flow totaled $714 million in the nine months ended September, 11% ahead of last year's record pace. This month, the company approved up to $400 million in stock buybacks for 2012, enough to repurchase more than 6% of outstanding shares.

Even if prevailing macroeconomic headwinds continue in 2012, management appears confident Alliance can hold its course. For 2012, Alliance forecasts profits of $8.30 per share excluding special items, up 12% on 9% revenue growth. Alliance also expects at least 10% higher free cash flow.

Conclusion

Prolonged economic weakness could hurt Alliance if businesses cut back on their marketing, but the stock's valuation already reflects some uncertainty. At just 14 times trailing earnings, shares trade 27% below their three-year average P/E ratio. Should the P/E rise to just 15 and Alliance match its 2012 profit guidance, the shares will gain 19% by early 2013. An annual report for Alliance Data Systems Corp. is available at 7500 Dallas Parkway, Suite 700, Plano, Texas 75024; (214) 494-3000; www.alliancedata.com.

ALLIANCE DATA SYSTEMS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '11
2.16
vs.
1.55
+ 20%
101.51
-
80.38
15 - 12
Jun '11
1.75
vs.
1.38
+ 11%
97.00
-
80.31
15 - 12
Mar '11
2.03
vs.
1.38
+ 12%
86.10
-
67.67
15 - 12
Dec '10
1.55
vs.
1.67
+ 38%
71.76
-
58.58
12 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
2.79
5.86
0.00
78.18
-
52.70
13 - 9
2009
1.96
5.21
0.00
69.09
-
22.76
13 - 4
2008
2.03
4.40
0.00
75.00
-
34.76
17 - 8
2007
2.29
3.75
0.00
80.79
-
56.78
22 - 15
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
74
56
93
47
86
91

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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