We See Value In Brand-Builder

5/16/2011


  Recent Price
$91
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
14
  Shares (millions)
55
  Long-Term Debt as % of Capital
99%
  52-Week Price Range
$97.00 - $53.15

As mass-media audiences splinter into smaller segments, companies are adopting new strategies to market themselves and communicate with consumers. Alliance Data Systems ($91; ADS) helps companies extend their brand with direct-marketing services, customer-loyalty programs, and private-label credit cards.

In the past decade, Alliance's sales have grown at an annualized rate of 15%, while cash provided by operations has risen at a 26% clip. Alliance has delivered six straight quarters of year-to-year growth in sales and free cash flow.

All three of Alliance's segments generated double-digit sales growth in 2010. With the economy improving, the use of loyalty programs and issuance of credit cards is on the rebound. Management sees revenue growing more than 7% in 2011 to exceed $3 billion. Alliance's forecast for free cash flow is $7.68 per share in 2011, down from $14.96 per share last year but still higher than any other annual total in the last decade. Earning a Quadrix Overall score of 97, Alliance is a Buy.

Business breakdown

Alliance's largest unit provides processing and maintenance services for more than 100 private-label and cobranded credit-card programs (49%, 67% of operating income from continuing operations). The segment processes millions of new card applications each year and currently services more than 23 million active accounts. Revenue rose 9% in the March quarter.

The LoyaltyOne business (29% of 2010 revenue, 24%) operates primarily in Canada, where about two-thirds of households participate in the AIR MILES program. The program lets consumers earn airline miles and other rewards on purchases made through a network of roughly 120 retailers and banks. The unit also owns a 31% stake in a Brazilian loyalty program preparing for a national rollout this year. Revenue grew 9% in the March quarter.

Epsilon (22%, 9%) manages loyalty programs and marketing databases for more than 600 clients in financial services, retail, hospitality, and pharmaceuticals. The unit's sales, up 23% in the March quarter, should get a lift from the $345 million acquisition of Aspen Marketing Services, expected to close in the June quarter. Epsilon reported a security breach in April that affected about 2% of its client base and was limited to consumer names and email addresses.

Conclusion

Nearly 50% of Alliance's 2010 revenue came from 10 clients. No major contracts appear to be coming up for renewal in 2011. Alliance has exceeded the consensus profit estimate in each of the last four quarters. Wall Street's full-year earnings target of $7.11 per share implies 21% growth on 9% higher revenue.

Shares trade at 13 times the 2011 consensus, 19% below the industry average. Alliance also looks cheap relative to its own five-year average valuation, trading at an 18% discount based on the price/sales ratio and a 9% discount to the price/cash flow ratio. 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
Mar '11
2.03
vs.
1.38
+ 12%
86.10
-
69.67
15 - 12
Dec '10
1.55
vs.
1.67
+ 38%
71.76
-
58.58
12 - 10
Sep '10
1.55
vs.
1.40
+ 46%
67.79
-
53.15
12 - 9
Jun '10
1.28
vs.
0.95
+ 46%
78.18
-
59.12
14 - 11
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
97
83
70
94
43
90
88

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


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