Alliance Data's Bold Bet Pays Off

10/1/2012


  Recent Price
$142
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
17
  Shares (millions)
64
  Long-Term Debt as % of Capital
93%
  52-Week Price Range
$144.34 - $84.91

Amidst the financial crisis, when banks listed toward bankruptcy and the stock market toward an abyss, Alliance Data Systems ($142; ADS) made a bold, contrarian move — it bet on itself. While rivals scrambled to fortify their balance sheets, Alliance Data took on debt to repurchase $1.5 billion in shares from 2008 to 2009 at an average price of just $51.

It didn't take long for that investment to pay off. Earnings per share, revenue, and operating cash flow have set record highs in each of the past two years. And they continued to rise in the first half of 2012, with per-share earnings and sales both up 19%, and operating cash flow up 3%. Since Alliance Data's repurchase, the stock has nearly tripled, and the $1.5 billion investment is worth $4.18 billion.

Operating momentum helped push the shares to an all-time high in September, and the stock remains up 37% on the year, more than twice the 14% gain of the S&P 1500 Index. Yet the shares don't seem overvalued, earning a Quadrix Value score of 49 and trading at 17 times trailing earnings, a 20% discount to the three-year average P/E ratio. Alliance Data Systems is a Focus List Buy and a Long-Term Buy.

Business breakdown

Alliance Data's business is tied to consumer spending and corporate marketing budgets. In the U.S. and Canada, Alliance expects spending on marketing to reach $410 billion by 2015, up from $330 billion in 2010. Since its formation in 1996, Alliance Data has built its business around the belief that advances in data collection could help clients achieve better results with targeted-marketing programs than through traditional mass marketing.

With more than 1,000 clients — including retailers, drugmakers, hotels, and banks — Alliance Data operates three business units, all of which produced double-digit sales growth in the first half of 2012. The private-label unit (46% of sales, 67% of operating income) offers processing and maintenance services for more than 100 private-label and cobranded credit-card programs. LoyaltyOne (28%, 19%) operates a rewards program for shoppers who make purchases at a network of more than 120 retailers and banks. About 70% of Canadian households participate in LoyaltyOne's Air Miles program. Epsilon (26%, 14%) manages loyalty programs and marketing databases.

Conclusion

As shrewd managing analyst expectations as it is repurchasing stock, Alliance Data has topped the consensus profit estimate in 12 straight quarters. Growth should moderate in the September quarter, with analysts expecting earnings per share up 2%. Favorable trends in credit-card receivables and charge-off rates could spark some upside in September-quarter results. The consensus calls for a 10% profit jump in the December quarter, followed by 14% growth in 2013.

Most of the convertible debt that allowed Alliance Data to repurchase shares during the recession will mature by the end of 2013, reducing the overhang of the so-called phantom shares that have inflated the share count in recent quarters. 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
Jun '12
2.13
vs.
1.75
+ 17%
135.49
-
119.56
17 - 15
Mar '12
2.38
vs.
2.03
+ 20%
127.55
-
100.42
17 - 13
Dec '11
1.70
vs.
1.56
+ 12%
107.33
-
84.91
14 - 11
Sep '11
2.16
vs.
1.55
+ 20%
101.51
-
80.38
15 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
3.17
7.63
0.00
107.33
-
69.67
14 - 9
2010
2.79
5.86
0.00
78.18
-
52.70
13 - 9
2009
1.96
4.64
0.00
69.09
-
22.76
15 - 5
2008
2.03
4.37
0.00
75.00
-
34.76
17 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
81
54
49
96
53
79
72

   * Earnings exclude special items. Note: Core earnings exclude stock compensation expenses and noncash expenses and gain connected to convertible debt.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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