Don't Be Fooled: ADS Has Further To Go

1/20/2014


  Recent Price
$256
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
27
  Shares (millions)
66
  Long-Term Debt as % of Capital
91%
  52-Week Price Range
$265.35 - $149.83

Since we first recommended Alliance Data Systems ($256; ADS) in May 2011, the stock has soared 175% while the S&P 1500 Index gained 37%. Partly a reflection of that rally, Alliance earns a Value score of just 33 and an Overall rank of 73. The stock now trades at 27 times trailing earnings, a 23% premium to its five-year average and 26% above the median P/E ratio for S&P 1500 technology stocks.

However, the current valuation is not unprecedented — Alliance's P/E has averaged 29 over the past year and frequently exceeded 28 in the years leading up to the financial crisis. Given its stellar growth, the stock seems capable of more outperformance. Alliance Data Systems is a Focus List Buy and a Long-Term Buy.

Business breakdown

Alliance stands to benefit from several long-term trends. The private-label business (47% of sales in the first nine months of 2013, 73% of operating income) positions Alliance to catch the recovery in consumer spending and the steady shift toward electronic payments. About 45% of global consumer transactions last year used cash, and that share could fall by half over the next decade. Alliance says its activated private-label cards inhabit the wallets of one of every 10 employed U.S. adults — compared to one of 12 just two years ago. The average receivables balance for the private-label unit rose 15% in the month of December and 14% during the December quarter.

Meanwhile, marketing budgets move toward increased use of digital media and more sophisticated strategies to induce shoppers to spend. Epsilon (32%, 8%), Alliance's marketing and loyalty program, helps clients design targeted campaigns.

The LoyaltyOne (21%, 18%) rewards program operates in Canada and Brazil. More than two-thirds of Canadian households participate in LoyaltyOne's Air Miles program. Membership in Dotz, a Brazilian loyalty program modeled after Air Miles, is nearing 10 million people.

Alliance reported 10% higher per-share earnings and 18% higher sales for the 12 months ended September. Moreover, Alliance's sales have risen by more than 7% in 16 consecutive quarters.

For the 12 months ending September, consensus estimates project Alliance will increase earnings per share 23% on 13% higher sales. Its peer group is projected to average growth of 12% for earnings and 8% for sales.

Alliance's business model requires little capital spending to generate growth, freeing up cash for other uses. Earlier this month, management announced plans to repurchase up to $400 million in shares in 2014.

The overhang concerning phantom shares is also clearing. These phantom shares stem from a convertible loan that helped fund massive buybacks during the recession. Most of the debt matured at the end of 2013, with the rest to be gone by June 2014, allowing Alliance to wipe the phantom shares from its books. Management predicts the maturing loans and share repurchases will reduce the share count nearly 8% in 2014.

An annual report for Alliance Data Systems Corp. can be obtained 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 '13
2.67
vs.
2.37
20%
220.02
-
171.30
24 - 19
Jun '13
2.41
vs.
2.13
19%
185.32
-
152.80
21 - 17
Mar '13
2.55
vs.
2.38
18%
162.07
-
146.39
19 - 17
Dec '12
1.84
vs.
1.70
15%
148.41
-
135.91
17 - 16
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
3.64
8.71
0.00
148.41
-
100.42
17 - 12
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
5.16
0.00
69.09
-
22.76
13 - 4
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
73
64
33
89
54
88
81

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


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