Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: flesh on October 02, 2017, 05:57:03 PM

Title: ADS - Alliance Data Systems
Post by: flesh on October 02, 2017, 05:57:03 PM
I'm nearly positive there's another thread for this but couldn't find it.

I have a small position here and am still digging. Valuation, if you're okay with garp looks good, not great or could be great if there's a moat. Main reason it's not a larger position is because I can't figure out why card services has a moat or what it is, it's growth suggests a moat. I don't like taking large positions when intrinsic value is based on growth wo understanding the moat better, hopefully this will start a discussion.

Why there may be a margin of safety and some reasons for obfuscation:

-Actual debt is 6b cash is 1.9b, 9b ish of ev is tied to deposits and securitizations (non recourse), unless I'm wrong which wouldn't surprise me.

-significant buybacks last two years, exhausted as of q2 17

-mgmt alluded to paying off debt in the q2 17' ec as the buyback auth is exhausted or maybe some m & a. I'm assuming they pay of the 235m revolver due mid 18' and the 400m 17' senior notes for savings of 28m for CY 18'

-interest margin growth, I believe the following is from q1 17' ec transcript:

“Lastly to clarify the topic of raise in interest rates, yes the benefits Card Services made interest margin. The APR we charged is variable rate tied to primary, an increase in prime rate will reset the APR to the card holder within 2 billing cycles. Conversely funding costs which are about 70% fixed rate will reset over a two-year period.”

If I'm correct the 70% is based on 9b=6.3b. The june 25bps rate increase isn't yet reflected, good chance of another 25bps later this year and outlook is 3 more 25bps increases next year. That's a total of 1.25% if it happens. If one assumes a 1% increase on the 6.3 b you get an additional 63m flowing to 2018/19 pretax earnings.

-Closing the wedge: Collections were 50% outsourced in 16' and 50% in house. The recovery rates were 25% in 15'. The FH 17' recovery rates were 18%. As of recently, recovery has moved from 50% outsourced to 80-100% in house. Mgmt claims that the in house division is still collecting at a 25% rate hence the obvious move.

Annualizing the FH 17' provision for loan loss = 1.2b. At a 18% recovery rate you get 216m and at a 23% recovery rate you get 276m. If that's correct, you could add 60m to 2018 EBT.

-Mgmt claims that delinquencies foretell/track with charge offs, they put out a "wedge" last october based on this and thus far it has tracked perfectly with it. Because of delinquency trends they are claiming flat to lower charge offs in 18'. If flat, yoy growth will reflect.

-Absent charge offs, most of the company has been growing at a steady clip and mgmt is claiming 19% growth in core eps. Guiding to some core eps growth in 17' as well, back half weighted.

-Company pays 38% tax rate

I've valued this a few different ways and don't have a lot of confidence at this point that I'm accurate. Still messing around with it.

Here's a simple, crude, way to do it, bridging 16' with 18'.

2016 Ebitda = 1778m

+15% exclusive of below listed benefits, much lower than actual/guided growth 
= 2045
+28m interest savings
+63m net interest margin
+60m closing the wedge

= 2196m ebitda

-550m interest
-260m capex, mgmt claims capex is 3% of revenue and is guiding to 8.7b 18' rev

=1386m EBT

55.8m shares outstanding currently. Company pays 38%. Mgmt claims 1.1 fcf in 17' described as 200m divi, 500m buyback, 400m growth capex (q1 or 2 17' ec).
















Title: Re: ADS - Alliance Data Systems
Post by: no_free_lunch on November 17, 2017, 01:48:00 PM
I am going to do some homework on this over the weekend.   I have had them on my watchlist for a few years.  Seem like a solid compounder.  Certainly getting more attractive at these levels.

In addition to buying back shares, if you look at their longer term history they have alternated between share buybacks and share issuance depending on the stock price, which is what you would hope for.  They don't just blindly buy back shares regardless of pricing level.  In 2014 calendar when their stock shot up, they issued another 25% shares for instance.  Then the price moved down and they have been repurchasing for the past couple years.
Title: Re: ADS - Alliance Data Systems
Post by: vinod1 on November 17, 2017, 07:20:03 PM
I have taken only a brief look so could be wrong in my understanding:

- Their moat seems to be to be based on modest switching costs that its customers face along with being a low cost operator due to it having larger scale in its market segment (non-visa/mastercard/Amex/discovery) where there are the largest player.

 The only other player that I know of that is offering a somewhat similar service is Synchrony Financial. But they target larger customers like Walmart who have their own in-house marketing/analytics operations. ADS targets small to mid-sized where the companies do not have enough scale to do so effectively.

- I do not think it makes sense to look at FCF for a business which has nearly half its earnings from a credit card portfolio. When provisions are higher than charge offs, as is the case in the recent past, it results in high OCF and high FCF. But we know charge-offs and provisions are going to even out over the cycle. GAAP income is a pretty good indicator of owners earnings in this case.

- I would prefer to make bottom up adjustments from GAAP income statement as you know precisely what you are adding back. I think there are three main adjustments that need to be made to reported net income of $515 million for 2016 to get to normalized earnings.

1. Amortization of purchased intangibles. This is about $345 million. Not all of these expenses can be excluded. These are partly from purchased credit card portfolios and others which do not have really long lives. Assuming about 2/3 of these are non-economic. Pre-tax earnings can be increased by $230 million.

2. One-off charge to adjust for change in rewards expiry due to changes in law. This has cost the company $242 million and can be added back.

3. Loan loss provisions are coming off from historically low levels and higher expenses can be expected in future. Loans are about $16 billion and assuming a 7% loss rate, loan loss provisions should be about $1.1 billion. Company has provisioned $940 million in 2016. Thus we need to reduce pre-tax earnings by about $160 million. Management has guided to a 6.5% loss rate in the past but has revised it down to 5.5%.

The adjustments above total to $310 million pre-tax or about $200 million after tax at 35% rate. Thus total net income is about $715 million on about 56 million shares as of Q2, 2017. Thus normalized earnings are about $13 per share in 2016.

Not looking as cheap on this basis.

Vinod
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 17, 2017, 08:34:36 PM
Using EBITDA or FCF doesn't seem to make sense to me, this looks like a bank wearing a marketing services mask.

Its not even comparable to a captive financial arm like CAT, F, or GM has, when most of their profit comes from the non-financial business, ADS gets more than half their profits from the 2 banks. 
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 17, 2017, 09:44:14 PM
Using EBITDA or FCF doesn't seem to make sense to me, this looks like a bank wearing a marketing services mask.

Its not even comparable to a captive financial arm like CAT, F, or GM has, when most of their profit comes from the non-financial business, ADS gets more than half their profits from the 2 banks.

Comenity Bank earnings: $222,317,000
Comenity Capital earnings: $100,975,000

Since a large portion of their assets are in securitization, and from reading through a couple, none of the bonds list any FICO scores, so I have no idea what kind credit quality the assets have. But the bonds have 15% overcollateralization which pretty much gives a sign that they are bad. To contrast, since Synchrony was mentioned, they did an offering around a week ago with mostly prime FICO scores with 5% overcollateralization.

To be completely honest this looks like a lawsuit waiting to happen, I'm about 95% sure that FICO's have to be disclosed since Reg AB II was passed but I'll have to reread it.
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on November 25, 2017, 02:46:29 AM
There's a short thesis by Citron. And a decent writeup on VIC for anyone interested. I think it looks compelling, since the short thesis is basically about this being a consumer credit biz and not a software company. I somewhat agree but you don't really pay a software multiple. One needs to adjust their reported numbers as someone wrote. What I think is important considering where se probably are in the cycle; they bought back a shitload of shares during the GFC and seem opportunistic. I also like that management has skin in the game and a long track record, plus ValueAct has a large stake. Would probably make sense to split the Company but that's just an option.
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 25, 2017, 08:34:24 AM
There's a short thesis by Citron. And a decent writeup on VIC for anyone interested. I think it looks compelling, since the short thesis is basically about this being a consumer credit biz and not a software company. I somewhat agree but you don't really pay a software multiple. One needs to adjust their reported numbers as someone wrote. What I think is important considering where se probably are in the cycle; they bought back a shitload of shares during the GFC and seem opportunistic. I also like that management has skin in the game and a long track record, plus ValueAct has a large stake. Would probably make sense to split the Company but that's just an option.

The problem is because of the prevalence of the 2 banks figuring out the software business multiple means nothing. This all depends on the credit quality of the two banks as well as the health of the credit card securization market. Simple research shows that we can assume the credit quality is below par. They buy subprime credit card receivables package them and have to pocket 5% of each transaction. The fact that management  throw the word EBITDA around like it's going out of style shows they have little idea how their business really makes money, their trust now has something like $23 billion receivables in it.
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on November 25, 2017, 12:00:10 PM
There's a short thesis by Citron. And a decent writeup on VIC for anyone interested. I think it looks compelling, since the short thesis is basically about this being a consumer credit biz and not a software company. I somewhat agree but you don't really pay a software multiple. One needs to adjust their reported numbers as someone wrote. What I think is important considering where se probably are in the cycle; they bought back a shitload of shares during the GFC and seem opportunistic. I also like that management has skin in the game and a long track record, plus ValueAct has a large stake. Would probably make sense to split the Company but that's just an option.

The problem is because of the prevalence of the 2 banks figuring out the software business multiple means nothing. This all depends on the credit quality of the two banks as well as the health of the credit card securization market. Simple research shows that we can assume the credit quality is below par. They buy subprime credit card receivables package them and have to pocket 5% of each transaction. The fact that management  throw the word EBITDA around like it's going out of style shows they have little idea how their business really makes money, their trust now has something like $23 billion receivables in it.
Appreciate it. I still have a lot of reading to do. Usually stay away from companies like these, but it seems like they handled the GFC well. How do you explain that if credit quality was total crap (and how do you know?). Why would management run the risk of blowup when they own 2,5 pct. of the Company? It's possible you're right, I havent't dug in. Thanks
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 25, 2017, 12:40:33 PM
There's a short thesis by Citron. And a decent writeup on VIC for anyone interested. I think it looks compelling, since the short thesis is basically about this being a consumer credit biz and not a software company. I somewhat agree but you don't really pay a software multiple. One needs to adjust their reported numbers as someone wrote. What I think is important considering where se probably are in the cycle; they bought back a shitload of shares during the GFC and seem opportunistic. I also like that management has skin in the game and a long track record, plus ValueAct has a large stake. Would probably make sense to split the Company but that's just an option.

The problem is because of the prevalence of the 2 banks figuring out the software business multiple means nothing. This all depends on the credit quality of the two banks as well as the health of the credit card securization market. Simple research shows that we can assume the credit quality is below par. They buy subprime credit card receivables package them and have to pocket 5% of each transaction. The fact that management  throw the word EBITDA around like it's going out of style shows they have little idea how their business really makes money, their trust now has something like $23 billion receivables in it.
Appreciate it. I still have a lot of reading to do. Usually stay away from companies like these, but it seems like they handled the GFC well. How do you explain that if credit quality was total crap (and how do you know?). Why would management run the risk of blowup when they own 2,5 pct. of the Company? It's possible you're right, I havent't dug in. Thanks

In terms of the GFC the securization part of their business wasn't as large as it is today, as far as I can tell they didn't issue any bonds from 2004-2008.

For their credit quality, I have a previous comment on the thread that gives an explanation but they don't list the FICO scores of any of the receivables that they have in their trust which means we are mostly left in the dark in that respect. But each of these bonds have to have overcollaterialization. So in their most recent offering they have class A with 550M in principle class B with 42M in principle and class C with 27.5M. Then they have excess collateral of 115M, these are used as a buffer, the bigger the buffer the worse the credit quality of the underlying asset. If they thought they could get away with 45M in excess collateral they would as they would make more money on servicing the receivables. It equates to something like 15% of the bond being excess collateral which is the equivalent to some of the subprime auto offerings that I've looked at.

Plus they are non-recourse loans.   

https://www.sec.gov/cgi-bin/browse-edgar?company=World+Financial+Network+Credit+Card+Master+Note+Trust&owner=exclude&action=getcompany
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 25, 2017, 12:46:30 PM
Also their treasurer Michael Blackham has experience in subprime lending servicing that he was able to pick up leading up to the GFC at Fairbanks Capital Corp So it doesn't surprise me that what they are offering has become worse since 2014 when he took over.

Good luck to those invested. 
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on November 25, 2017, 12:59:48 PM
Much appreciated. I have a lot to learn in this space.
Title: Re: ADS - Alliance Data Systems
Post by: mwtorock on November 25, 2017, 07:30:13 PM
a couple of good managers hold large positions in this name: Jeffery Ubben and Glen Greenberg. just want to add one point about the management - they are good if you look back what they did during financial crisis:
1) Buy back shares in a big way
2) Expanded credit business when other credit guys had to cut back
3) They did not lay off people to cut cost
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 25, 2017, 07:34:34 PM
a couple of good managers hold large positions in this name: Jeffery Ubben and Glen Greenberg. just want to add one point about the management - they are good if you look back what they did during financial crisis:
1) Buy back shares in a big way
2) Expanded credit business when other credit guys had to cut back
3) They did not lay off people to cut cost

yeah both those managers owned Valeant.
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 25, 2017, 07:36:52 PM
I think Jeffery Ubben handpicked Pearson as well.
Title: Re: ADS - Alliance Data Systems
Post by: mwtorock on November 25, 2017, 07:52:59 PM
yeah, Valeant is a tough one for many.
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 25, 2017, 08:00:48 PM
Here is their credit card agreements with different companies

https://www.consumerfinance.gov/credit-cards/agreements/issuer/comenity-bank/

Has a 28% ROE and 4% ROA. sort of crazy.

https://research.fdic.gov/bankfind/detail.html?bank=%2027499&%20name=Comenity%20Bank

Title: Re: ADS - Alliance Data Systems
Post by: Cameron on November 25, 2017, 08:49:37 PM
Might be of interest as well.


https://secure.utah.gov/uccsearch/uccs/result#
Title: Re: ADS - Alliance Data Systems
Post by: vince on March 29, 2018, 01:29:02 PM
hey Cameron, are u saying that Jeff and Glenn's records are no good anymore because of valeant?  the number of investors with good re cords that got burned by vrx is a head scratcher but to disregard a stock, where 2 phenomenal investors have large positions and 1 has board representation is probably a little shortsighted, no?
Title: Re: ADS - Alliance Data Systems
Post by: Cameron on March 29, 2018, 05:22:28 PM
hey Cameron, are u saying that Jeff and Glenn's records are no good anymore because of valeant?  the number of investors with good re cords that got burned by vrx is a head scratcher but to disregard a stock, where 2 phenomenal investors have large positions and 1 has board representation is probably a little shortsighted, no?

No, more had to with the idea that other investors being invested in a stock isn't a real reason to own it. ie Buffett with IBM, Jeff and Glenn with VRX, Einhorn and New Century. I didn't like the stock because they aren't transparent at all with the 2 banks they have, pawn off their EBITDA numbers as if they have no idea that something like 60% of it comes from those two banks pretty much turned me off. We would all scratch our heads if JPM or C were to be ecstatic about their EBITDA numbers. They also provide nothing as to their credit quality and based on the little info that is public it looks like the credit they hold isn't of the best quality.

Whoever owns it doesn't change the fact that its a subprime credit card company.
Title: Re: ADS - Alliance Data Systems
Post by: WayWardCloud on May 27, 2018, 02:58:56 PM
It looks like Allan Mecham increased his stake in ADS by a lot during Q1, now standing at 14% of his portfolio. Way out of my circle of competence though  ::)
Title: Re: ADS - Alliance Data Systems
Post by: bennycx on May 28, 2018, 05:58:48 AM
Their focus on "core" EPS rather than EPS seems strange to me.. the two numbers are very different
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on May 28, 2018, 07:54:36 AM
Whoever owns it doesn't change the fact that its a subprime credit card company.

The stock doesn't know who owns it so this clearly true. But when you see investors like Ubben, Greenberg, and Arlington, it is worth understanding why. And then you look at the growth rate and the performance during the GFC and it is pretty clear that this is not just a subprime credit card company. This is similar to saying that NVR is just a home builder or CACC is just a subprime auto lender. There is clearly something very unique about ADS. I haven't figured it out yet.

One thing that I find interesting is that they are on-boarding very high-end clients like IKEA but the stock price is the same as the end of 2013. This looks like a compelling setup -- though obviously the credit and funding risks are significant. And this is a very complex company.
Title: Re: ADS - Alliance Data Systems
Post by: Spekulatius on May 28, 2018, 08:46:36 AM
Their focus on "core" EPS rather than EPS seems strange to me.. the two numbers are very different

Core earnings appear back out amortization from intangibles. It looks to me that I’d they acquire a business, they acquire some good will as well. That goodwill seems to me most customer relationships, which I don’t think have that much long term value, so they need to get replaced constantly. I don’t think they backing them out is entirely expensive right way to look at economic earnings and may the market has figured out thw thr GAZP earnings are the correct way to look at stock. Based on GAAP earnings, ADS doesn’t look that cheap.
Title: Re: ADS - Alliance Data Systems
Post by: HJ on May 28, 2018, 09:14:51 AM
Their focus on "core" EPS rather than EPS seems strange to me.. the two numbers are very different

Core earnings appear backmout amortization from intangibles. It looks to me that I’d they acquire a business, they acquire some good will as well. That goodwill seems to me most customer relationships, which I don’t think have that much long term value, so they need to get replaced constantly. I don’t think they backing them out is entirely expensive right way to look at economic earnings and may the market has figured out thw thr GAZP earnings are the correct way to look at stock. Based on GAAP earnings, ADS doesn’t look that cheap.

If you think of their customers as just the subprime borrowers, these individual customer relationships may not have a lot of long term value.  If you think of their customer as the retailers, then there is some long term value in the retailer's ability to originate these credits profitably. 
Title: Re: ADS - Alliance Data Systems
Post by: Spekulatius on May 28, 2018, 09:25:34 AM
Just by looking at their website, they regard the retailers as their customers, not the individual account holders, which is quite telling, IMO. I think there has been quite a bit of churn in their retail customer base as well, possibly due to a lot of retailers going out of business.

I just noticed going back, that ADS seem to purchase assets with goodwill attached to it even when their business didn’t really show increases YoY, which sort of tells us that this goodwill is not all growth expense. Do they pay their customer upfront when they initiate a customer relationship?
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on May 28, 2018, 09:54:15 AM
Core earnings appear back out amortization from intangibles. It looks to me that I’d they acquire a business, they acquire some good will as well. That goodwill seems to me most customer relationships, which I don’t think have that much long term value, so they need to get replaced constantly. I don’t think they backing them out is entirely expensive right way to look at economic earnings and may the market has figured out thw thr GAZP earnings are the correct way to look at stock. Based on GAAP earnings, ADS doesn’t look that cheap.

It looks like when they purchase a collection of receivables at a premium, it is because of the long term value to signing that retailer. If they buy a collection of receivables from Williams-Sonoma, they are expecting the ongoing relationship with Williams-Sonoma to replenish those A/R. So they don't need to get replaced constantly.

Having said that, there is certainly churn in the portfolio as brands go bankrupt or falter. So perhaps amortization is a real expense. But IIRC, they said in the last call that they expect the core portfolio to be roughly flat. And any new customers would contribute growth. In which case, some of that amortization is non-economic.
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on May 28, 2018, 10:00:59 AM
I just noticed going back, that ADS seem to purchase assets with goodwill attached to it even when their business didn’t really show increases YoY, which sort of tells us that this goodwill is not all growth expense. Do they pay their customer upfront when they initiate a customer relationship?

Going back to 2009, every year showed material growth in revenue and A/R. Which could be consistent with these acquisitions being growth not maintenance.
Title: Re: ADS - Alliance Data Systems
Post by: Spekulatius on May 28, 2018, 05:28:40 PM
I just noticed going back, that ADS seem to purchase assets with goodwill attached to it even when their business didn’t really show increases YoY, which sort of tells us that this goodwill is not all growth expense. Do they pay their customer upfront when they initiate a customer relationship?

Going back to 2009, every year showed material growth in revenue and A/R. Which could be consistent with these acquisitions being growth not maintenance.

I think the intangible depreciation is very likely a combination of both growth and Capex. I am not even sure that customer retention matters too much. Depending on thr contract length, I think it is very likely, that the customer will demand another pound of flesh so to speak to extend a contract.  I did notice they intangible depreciation has been rising faster than revenue during thr last few years.

Then ADS has negative tangible equity. Their captive bank sub Comenity has about $1.8B in equity, ( which equals total ADS equity) which has to be mostly tangible (didn’t dig into FDIC records too far), so this means that the debt and the intangibles mostly reside at the Holding Company Level or another operating sub. This could be an issue if the FDIC disallows distributions to the holding company from Comenity.
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on May 29, 2018, 07:36:29 AM
I think it is very likely, they the customer will demand another pound of flesh so to speak to extend a contract.

Private Label credit cards should have substantial switching costs. So ADS would have better negotiating power on renewal than new bookings.
Title: Re: ADS - Alliance Data Systems
Post by: vinod1 on May 29, 2018, 09:38:49 AM
Switching costs vary by size of retailer. They are high for smaller retailers which is the market ADS focuses on. Still their two largest customers make up 30% of the card segment revenue. These customers probably have a lot more leverage and likely less profitable.

If it is purely private label card, then switching costs are not all that much. Citi (with exception of Costco) and Capital One can onboard a new retailer pretty efficiently. Where ADS has increased switching costs is by integrating marketing with cards. Epsilon and LoyaltyOne makes it a pain for smaller retailers to move their private label cards.

It is difficult to know from outside what percentage of the business has switching costs. They do not share this data, quite understandably.

As far as amortization goes, I agree with Spekulatius. It is part economic and part non-economic. If they do not make any portfolio acquisition say over the next 10 years, can they grow their portfolio in inflation adjusted terms? I doubt it.

So personally I add back only about 2/3 of intangible amortization and further tax it.

Vinod

 
Title: Re: ADS - Alliance Data Systems
Post by: cmlber on May 29, 2018, 10:18:43 AM
Switching costs vary by size of retailer. They are high for smaller retailers which is the market ADS focuses on. Still their two largest customers make up 30% of the card segment revenue. These customers probably have a lot more leverage and likely less profitable.

If it is purely private label card, then switching costs are not all that much. Citi (with exception of Costco) and Capital One can onboard a new retailer pretty efficiently. Where ADS has increased switching costs is by integrating marketing with cards. Epsilon and LoyaltyOne makes it a pain for smaller retailers to move their private label cards.

I don't think this is true.  Look at SYF.  Lowe's has been with them for ~40 years.  Most of their large retailer relationships are 10-20 years, and their ROE's are very high.  It's not a simple switch for the retailer.
Title: Re: ADS - Alliance Data Systems
Post by: racemize on May 29, 2018, 10:41:42 AM
Switching costs vary by size of retailer. They are high for smaller retailers which is the market ADS focuses on. Still their two largest customers make up 30% of the card segment revenue. These customers probably have a lot more leverage and likely less profitable.

If it is purely private label card, then switching costs are not all that much. Citi (with exception of Costco) and Capital One can onboard a new retailer pretty efficiently. Where ADS has increased switching costs is by integrating marketing with cards. Epsilon and LoyaltyOne makes it a pain for smaller retailers to move their private label cards.

I don't think this is true.  Look at SYF.  Lowe's has been with them for ~40 years.  Most of their large retailer relationships are 10-20 years, and their ROE's are very high.  It's not a simple switch for the retailer.

Citi did take the card from AmEx for Costco though, so it is definitely doable.
Title: Re: ADS - Alliance Data Systems
Post by: cmlber on May 29, 2018, 11:40:11 AM
Switching costs vary by size of retailer. They are high for smaller retailers which is the market ADS focuses on. Still their two largest customers make up 30% of the card segment revenue. These customers probably have a lot more leverage and likely less profitable.

If it is purely private label card, then switching costs are not all that much. Citi (with exception of Costco) and Capital One can onboard a new retailer pretty efficiently. Where ADS has increased switching costs is by integrating marketing with cards. Epsilon and LoyaltyOne makes it a pain for smaller retailers to move their private label cards.

I don't think this is true.  Look at SYF.  Lowe's has been with them for ~40 years.  Most of their large retailer relationships are 10-20 years, and their ROE's are very high.  It's not a simple switch for the retailer.

Citi did take the card from AmEx for Costco though, so it is definitely doable.

Agreed. But doable and low-switching costs are two very different things. For SYF to have the ROE's they have with the length of relationships they have tells you there are meaningful switching costs. 
Title: Re: ADS - Alliance Data Systems
Post by: racemize on May 29, 2018, 11:44:51 AM
Yeah, the Citi transition certainly wasn't as smooth as desired...
Title: Re: ADS - Alliance Data Systems
Post by: HJ on May 29, 2018, 12:15:02 PM
Citi paid up for the Costco relationship.  While undisclosed on detail, by Amex's account, Citi paid up a lot.  It is certainly fair to say that Costco relationship is likely worth a lot more than the typical retailer relationship in ADS portfolio.  Pre crisis, when credit card portfolio transactions are more common, they routinely trade 10+% premium to underlying balance, to be amortized over a 4-5 year period, even if it's a subprime portfolio.  The latest exercise in the headlines had Capital One paying roughly $200MM premium to buy the Cabela's portfolio of $5.7 billion, which is not a subprime portfolio.  But prior to that, they sold the Best Buy credit card portfolio (to Citi), reportedly at book.  Not saying all of these trades are at the right value, but these are some of the yard sticks out there.   
Title: Re: ADS - Alliance Data Systems
Post by: vinod1 on May 29, 2018, 12:48:16 PM
What I am trying to say is compared to larger companies, smaller companies have higher switching costs.

Credit cards (general purpose or private label single store) have wonderful economics. They are like legalized mafia. High teen NIM gives you a lot of MOS. As long as a company has scale and sticks to basics, they can make pretty good money.

ADS and SYF, basically share these profits with their customers. If you look at SYF, they disclose how much they pay their customers (retailers,etc). It is pretty close to 50/50 profit sharing on a pre-tax basis.

I think ADS has a slightly stronger moat than SYF as they focus on smaller companies.

Length of relationship and having ROE is a good data point but does not tell us conclusively either about switching costs (they could be sharing more of the profitability to retain the relationship or ROE could be coming from some other set of companies within their customer base).

Vinod
Title: Re: ADS - Alliance Data Systems
Post by: Saluki on July 02, 2018, 12:13:16 PM
Does anyone know how the Air Miles and other rewards work with ADS and the merchant and customers? Do the rewards come out of ADS' split of the profits, or the retailer's? 

In learning about Berkshire's experience with the float at Blue Chip Stamps, it occurs to me that miles that a customer earns, but won't be redeemed for years would have the same characteristics as the float at BCS.
Title: Re: ADS - Alliance Data Systems
Post by: glorysk87 on July 02, 2018, 01:49:03 PM
Does anyone know how the Air Miles and other rewards work with ADS and the merchant and customers? Do the rewards come out of ADS' split of the profits, or the retailer's? 

In learning about Berkshire's experience with the float at Blue Chip Stamps, it occurs to me that miles that a customer earns, but won't be redeemed for years would have the same characteristics as the float at BCS.

ADS is paid a fee per mile earned.  On the rewards side, they are responsible for purchasing/paying for any rewards that are redeemed by the consumers.

To your point, the business operates with a float seeing as ADS is paid upfront per mile but some time elapses before that mile is redeemed for a reward.
Title: Re: ADS - Alliance Data Systems
Post by: Cigarbutt on July 02, 2018, 01:50:18 PM
Does anyone know how the Air Miles and other rewards work with ADS and the merchant and customers? Do the rewards come out of ADS' split of the profits, or the retailer's? 

In learning about Berkshire's experience with the float at Blue Chip Stamps, it occurs to me that miles that a customer earns, but won't be redeemed for years would have the same characteristics as the float at BCS.
Th

Just to add some details:

Loyalty programs tend to report results with some variations but there are some underlying principles. I am relatively familiar with the Loyalty One sub but don't know much about other ADS subs.

Basically, sponsors pay "fees" to ADS when collectors use their loyalty cards during a purchase. This gives rise to a promise for rewards to collectors which results in deferred revenue (ADS recognizes immediately some revenue as a "service" component). Accounting profit will be generated if the cost from suppliers is less than revenue recognized. Estimates are influenced by breakage (points that will never be redeemed, about 20%) and average "life" of the reward (about 40 months).

You are correct in saying that funds can be held for some time between the accumulation phase and the redemption phase but, contrary to insurance float which is regulated and supervised, loyalty programs have more flexibility so due diligence is important.

How the float is invested can make a difference too as I understand that, with Blue Chip Stamps, return from invested float was the main ingredient for success and not the underlying business which was essentially in a run-off mode.
Title: Re: ADS - Alliance Data Systems
Post by: Saluki on July 03, 2018, 02:30:17 PM
Thanks for the help!
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 04, 2018, 11:38:19 AM
What I am trying to say is compared to larger companies, smaller companies have higher switching costs.

Credit cards (general purpose or private label single store) have wonderful economics. They are like legalized mafia. High teen NIM gives you a lot of MOS. As long as a company has scale and sticks to basics, they can make pretty good money.

ADS and SYF, basically share these profits with their customers. If you look at SYF, they disclose how much they pay their customers (retailers,etc). It is pretty close to 50/50 profit sharing on a pre-tax basis.

I think ADS has a slightly stronger moat than SYF as they focus on smaller companies.

Length of relationship and having ROE is a good data point but does not tell us conclusively either about switching costs (they could be sharing more of the profitability to retain the relationship or ROE could be coming from some other set of companies within their customer base).

Vinod

SYF share a ROA basically, but in bad times the share is in favour of SYF. It is not necessarily 50/50 all the time and depends on the individual client.
Title: Re: ADS - Alliance Data Systems
Post by: abitofvalue on July 04, 2018, 11:45:34 AM

SYF share a ROA basically, but in bad times the share is in favour of SYF. It is not necessarily 50/50 all the time and depends on the individual client.

correct. SYF is 50/50 after SYF earns a preferred return (believe ~1.5% ROA).

Title: Re: ADS - Alliance Data Systems
Post by: abitofvalue on July 04, 2018, 11:54:59 AM

Citi did take the card from AmEx for Costco though, so it is definitely doable.

not sure Citi / Costco is the best example - that was a co-brand card deal and a huge deal where the non-Costco spend was very important not just the actual in-Costco spend . Co-brand has more players and much easier to manage then a private label card.. ADS is more competitive in private-label.  Fewer large banks want / compete here and that has helped keep the costs of acquiring relationships in check... that said clearly the costs of acquiring customers is increasing and ADS seems to be willing to pay up for this - see for example the Children's Place deal that they won last year. 

IMO - The bear case is two pronged - 1) this is a credit card company masquerading as a marketing / IT company by indexes and if valued like credit card companies its overvalued and 2) Management is growing card receivables late in the credit cycle so losses will go up as the cycle turns.
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 04, 2018, 12:10:38 PM

Citi did take the card from AmEx for Costco though, so it is definitely doable.

not sure Citi / Costco is the best example - that was a co-brand card deal and a huge deal where the non-Costco spend was very important not just the actual in-Costco spend . Co-brand has more players and much easier to manage then a private label card.. ADS is more competitive in private-label.  Fewer large banks want / compete here and that has helped keep the costs of acquiring relationships in check... that said clearly the costs of acquiring customers is increasing and ADS seems to be willing to pay up for this - see for example the Children's Place deal that they won last year. 

IMO - The bear case is two pronged - 1) this is a credit card company masquerading as a marketing / IT company by indexes and if valued like credit card companies its overvalued and 2) Management is growing card receivables late in the credit cycle so losses will go up as the cycle turns.

Something I have never understood is ADS trying so hard to be perceived as tech / data monetization company. They take credit risk like SYF / Citi / JP and other peers, period. Hence, ADS should be valued in line with SYF IMO if not lower given distant #2.

Title: Re: ADS - Alliance Data Systems
Post by: Spekulatius on July 10, 2018, 05:41:56 PM

Citi did take the card from AmEx for Costco though, so it is definitely doable.

not sure Citi / Costco is the best example - that was a co-brand card deal and a huge deal where the non-Costco spend was very important not just the actual in-Costco spend . Co-brand has more players and much easier to manage then a private label card.. ADS is more competitive in private-label.  Fewer large banks want / compete here and that has helped keep the costs of acquiring relationships in check... that said clearly the costs of acquiring customers is increasing and ADS seems to be willing to pay up for this - see for example the Children's Place deal that they won last year. 

IMO - The bear case is two pronged - 1) this is a credit card company masquerading as a marketing / IT company by indexes and if valued like credit card companies its overvalued and 2) Management is growing card receivables late in the credit cycle so losses will go up as the cycle turns.

Something I have never understood is ADS trying so hard to be perceived as tech / data monetization company. They take credit risk like SYF / Citi / JP and other peers, period. Hence, ADS should be valued in line with SYF IMO if not lower given distant #2.

Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on July 10, 2018, 06:14:07 PM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.
Title: Re: ADS - Alliance Data Systems
Post by: vince on July 10, 2018, 07:54:21 PM
The nice thing about buying a company at 10 times cash earnings is you can still do very well with no multiple expansion, assuming the earnings are stable and growing a few percent.  In ADS's case there is strong evidence that receivables will grow at least high single digits for a good amount of time...there is obvious demand for their services. They use maybe 500 million out of 1.5 billion fcf to support the lending growth. And assuming that its managed similar to the past their card services earnings should grow right along with receivables growth.  When you add the cash flow yield to their growth rate you get a very nice return using conservative estimates (historical card services growth rate is well above 8-10 percent) with a constant earnings multiple.  I dont understand all the negativity about this business...they have a fantastic long term record and every reason to believe it will continue.
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 11, 2018, 04:29:26 AM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.
Title: Re: ADS - Alliance Data Systems
Post by: vince on July 11, 2018, 05:28:41 AM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 11, 2018, 06:38:30 AM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Title: Re: ADS - Alliance Data Systems
Post by: vince on July 11, 2018, 08:05:53 AM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 11, 2018, 08:21:47 AM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that

An absolute return does not mean anything. Do the following: scatter all ADS peers and check the P/B vs the ROE. That way you can see what firm is valued how on that basis. I recommend to read some basics on valuation.
Title: Re: ADS - Alliance Data Systems
Post by: vince on July 11, 2018, 10:03:41 AM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that

An absolute return does not mean anything. Do the following: scatter all ADS peers and check the P/B vs the ROE. That way you can see what firm is valued how on that basis. I recommend to read some basics on valuation.
Exactly as I thought, Lmao, good luck to you and your process, your gonna need it.
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 11, 2018, 02:45:00 PM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that

An absolute return does not mean anything. Do the following: scatter all ADS peers and check the P/B vs the ROE. That way you can see what firm is valued how on that basis. I recommend to read some basics on valuation.
Exactly as I thought, Lmao, good luck to you and your process, your gonna need it.

Took you a great number of posts to comprehend an easy correlation. Let's return to the topic. Have a close look at, among others, ADS' balance sheet. I stand by it; overall, I am long SYF over ADS.
Title: Re: ADS - Alliance Data Systems
Post by: vince on July 12, 2018, 07:02:40 AM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that

An absolute return does not mean anything. Do the following: scatter all ADS peers and check the P/B vs the ROE. That way you can see what firm is valued how on that basis. I recommend to read some basics on valuation.
Exactly as I thought, Lmao, good luck to you and your process, your gonna need it.

Took you a great number of posts to comprehend an easy correlation. Let's return to the topic. Have a close look at, among others, ADS' balance sheet. I stand by it; overall, I am long SYF over ADS.

WOW!!! Have a close look at their balance sheet?  Im convinced now, thanks for your brilliant insights.
Title: Re: ADS - Alliance Data Systems
Post by: cmlber on July 12, 2018, 01:49:34 PM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that

An absolute return does not mean anything. Do the following: scatter all ADS peers and check the P/B vs the ROE. That way you can see what firm is valued how on that basis. I recommend to read some basics on valuation.
Exactly as I thought, Lmao, good luck to you and your process, your gonna need it.

Vince, you must have missed the famous Buffett quote, “Your goal as an investor should simply be to scatter plot companies by P/B on the X-axis and ROE on the Y-axis and buy the ones in the top left quadrant.”
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 12, 2018, 02:09:30 PM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that

An absolute return does not mean anything. Do the following: scatter all ADS peers and check the P/B vs the ROE. That way you can see what firm is valued how on that basis. I recommend to read some basics on valuation.
Exactly as I thought, Lmao, good luck to you and your process, your gonna need it.

Vince, you must have missed the famous Buffett quote, “Your goal as an investor should simply be to scatter plot companies by P/B on the X-axis and ROE on the Y-axis and buy the ones in the top left quadrant.”

cmlber, it is called irony. A fellow poster noted that ADS report a high ROE, hence would be the better stock vs SYF...
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 12, 2018, 02:12:51 PM
Switching costs vary by size of retailer. They are high for smaller retailers which is the market ADS focuses on. Still their two largest customers make up 30% of the card segment revenue. These customers probably have a lot more leverage and likely less profitable.

If it is purely private label card, then switching costs are not all that much. Citi (with exception of Costco) and Capital One can onboard a new retailer pretty efficiently. Where ADS has increased switching costs is by integrating marketing with cards. Epsilon and LoyaltyOne makes it a pain for smaller retailers to move their private label cards.

I don't think this is true.  Look at SYF.  Lowe's has been with them for ~40 years.  Most of their large retailer relationships are 10-20 years, and their ROE's are very high.  It's not a simple switch for the retailer.

Today's announcement does not necessarily imply SYF lost the WMT contract and it is WMT's obvious right ask for bids. But if SYF lost WMT as customer, this would be significant given the low penetration of PLCs at latter. SYF mgt have stretched how much they have invested in mobile capabilities in recent months. On top of that, I hope mgt do not bid for WMT at any ROA.

Title: Re: ADS - Alliance Data Systems
Post by: vince on July 12, 2018, 02:31:14 PM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that

An absolute return does not mean anything. Do the following: scatter all ADS peers and check the P/B vs the ROE. That way you can see what firm is valued how on that basis. I recommend to read some basics on valuation.
Exactly as I thought, Lmao, good luck to you and your process, your gonna need it.

Vince, you must have missed the famous Buffett quote, “Your goal as an investor should simply be to scatter plot companies by P/B on the X-axis and ROE on the Y-axis and buy the ones in the top left quadrant.”

cmlber, it is called irony. A fellow poster noted that ADS report a high ROE, hence would be the better stock vs SYF...

Just to be clear, that fellow poster was not me.  I simply asked how could someone be confident that ADS was fairly valued just based on book value.  Whoever read the exchange can judge for themselves how good the answers were
Title: Re: ADS - Alliance Data Systems
Post by: cmlber on July 12, 2018, 02:54:14 PM
Agreed. it’s not an asset light business like a software company. The economics should drive the valuation, not a fancy label from management.

ROE suggest the economics are very good and much better than SYF.

Misses the point vs P/B. On that basis ADS is fairly valued and SYF undervalued.

Can you explain your post please, how did you come to that conclusion?

Returns on absolute level not meaningful, but rather vs the market price.
Maybe its me but im not understanding what u are saying and for sure i dont see anything to back ur claim up.  I believe u stated they are fairly valued on price to book.  How did you come up with that conclusion? How are you confident in that assessment?  And then maybe a good discussion can come from that

An absolute return does not mean anything. Do the following: scatter all ADS peers and check the P/B vs the ROE. That way you can see what firm is valued how on that basis. I recommend to read some basics on valuation.
Exactly as I thought, Lmao, good luck to you and your process, your gonna need it.

Vince, you must have missed the famous Buffett quote, “Your goal as an investor should simply be to scatter plot companies by P/B on the X-axis and ROE on the Y-axis and buy the ones in the top left quadrant.”

cmlber, it is called irony. A fellow poster noted that ADS report a high ROE, hence would be the better stock vs SYF...

Just to be clear, that fellow poster was not me.  I simply asked how could someone be confident that ADS was fairly valued just based on book value.  Whoever read the exchange can judge for themselves how good the answers were

Actually, nobody said that... all that was said was ADS’ ROE shows that it has a superior business, not that it is the superior investment at current prices.
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on July 12, 2018, 10:55:07 PM
Couldn't you guys take your argument somewhere else? Thanks in advance. Some of us are trying to make money. :)

The SYF/WMT thingie is one of the reasons I went with ADS over SYF (that and great capital allocation plus insider ownership and experienced leadership). I think smaller clients are stickier and have less bargaining power (that said, they still have some big accounts that would be bad to lose).
Title: Re: ADS - Alliance Data Systems
Post by: tol1 on July 13, 2018, 12:51:16 AM
Couldn't you guys take your argument somewhere else? Thanks in advance. Some of us are trying to make money. :)

The SYF/WMT thingie is one of the reasons I went with ADS over SYF (that and great capital allocation plus insider ownership and experienced leadership). I think smaller clients are stickier and have less bargaining power (that said, they still have some big accounts that would be bad to lose).

What % of loan receivables and interest income are ADS' top 3 or 5 customers? Experienced leadership + insider O/S + cap allocation holds true for SYF as well btw.
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on July 13, 2018, 01:12:44 AM
Couldn't you guys take your argument somewhere else? Thanks in advance. Some of us are trying to make money. :)

The SYF/WMT thingie is one of the reasons I went with ADS over SYF (that and great capital allocation plus insider ownership and experienced leadership). I think smaller clients are stickier and have less bargaining power (that said, they still have some big accounts that would be bad to lose).

What % of loan receivables and interest income are ADS' top 3 or 5 customers? Experienced leadership + insider O/S + cap allocation holds true for SYF as well btw.

Don't think they disclose it. #1 is L Brands at 16 pct. of Card Service revenue and Ascena #2 at 13 pct. revenue. L Brands expires in 2019, so there's a bit of risk/opportunity (SYF has 20 pct. of total interest/fees up for grabs next year).

Overall the 10 largest customers account for some 52 pct. of revenues in Cards Services, whereas for SYF the five largest account for 53 pct. of total interest and fees.

Can't say definately which model is better, but from a high lever I prefer smaller retailers where ADS also delivers marketings solutions etc.

That said, I also think SYF looks interesting, which brings me to the point about capital allocation, insider ownership and management.

Didn't mean to say that SYF were disadvantaged, but I like how ADS' took advantage of the GFC to buy back shares on the cheap. Few companies did that (SYF wasn't public, so no record).

Not sure how one puts a number on that, but it makes me sleep better at night knowing that if a downturn hits (seems like one is long overdue), the companies I'm invested should be able to gain from it (not all of my investments but AZO, AN and ADS do). It makes it easier to just forget about macro and stay 100 pct. invested.

Also, there's some option value in LoyaltyOne. I think they should sell it if/when they dress it up a bit and it fetches a nice price. With ValueAct onboard I suppose they'll do it if it creates value.
Title: Re: ADS - Alliance Data Systems
Post by: mwtorock on July 13, 2018, 07:08:16 AM
Couldn't you guys take your argument somewhere else? Thanks in advance. Some of us are trying to make money. :)

The SYF/WMT thingie is one of the reasons I went with ADS over SYF (that and great capital allocation plus insider ownership and experienced leadership). I think smaller clients are stickier and have less bargaining power (that said, they still have some big accounts that would be bad to lose).



What % of loan receivables and interest income are ADS' top 3 or 5 customers? Experienced leadership + insider O/S + cap allocation holds true for SYF as well btw.

Don't think they disclose it. #1 is L Brands at 16 pct. of Card Service revenue and Ascena #2 at 13 pct. revenue. L Brands expires in 2019, so there's a bit of risk/opportunity (SYF has 20 pct. of total interest/fees up for grabs next year).

Overall the 10 largest customers account for some 52 pct. of revenues in Cards Services, whereas for SYF the five largest account for 53 pct. of total interest and fees.

Can't say definately which model is better, but from a high lever I prefer smaller retailers where ADS also delivers marketings solutions etc.

That said, I also think SYF looks interesting, which brings me to the point about capital allocation, insider ownership and management.

Didn't mean to say that SYF were disadvantaged, but I like how ADS' took advantage of the GFC to buy back shares on the cheap. Few companies did that (SYF wasn't public, so no record).

Not sure how one puts a number on that, but it makes me sleep better at night knowing that if a downturn hits (seems like one is long overdue), the companies I'm invested should be able to gain from it (not all of my investments but AZO, AN and ADS do). It makes it easier to just forget about macro and stay 100 pct. invested.

Also, there's some option value in LoyaltyOne. I think they should sell it if/when they dress it up a bit and it fetches a nice price. With ValueAct onboard I suppose they'll do it if it creates value.

best said.
Title: Re: ADS - Alliance Data Systems
Post by: Saluki on July 13, 2018, 07:29:27 AM




Can't say definately which model is better, but from a high lever I prefer smaller retailers where ADS also delivers marketings solutions etc.


This is a sample size of 1, but when I was in college in the 90s, I worked at a regional retailer in with about 30 stores. Our store card was issued by GE Capital  and Finance(now SYF). I was very impressed with how much more a  customer would buy on a store card, and how loyal they were.  Many times I would see someone come in for a $2k large screen TV, get issued a store card with 90 days no interest (24% after that!)and walk out with a $3k tv, speakers, cables, extended warranty etc.

The hardest part of the sale is getting the customer to actually come in the door, and if a credit card issuer can offer you services to get people in the door (or to spend more when they get there) it takes a lot of weight off the retailer's shoulders. For a smaller retailer that's a big lock in. 

Do you know how the phone company used to sell ads in the yellow pages in the old days?  If you were, say, a pizzeria, they would give you a "free ad" and give you a new phone number and phone. Usually, they place it next to your old phone.  After a few months, the salesperson comes to take out the new phone...the one that rings all the time with the orders. Then the pizza guy says "no! how much do I have to pay you to keep it?". 

The customer has a reason to keep using the card (I don't want to lose my airmiles etc.) and the retailer has a reason to keep using the card (the other cards charge the same, but I'm losing customers or getting smaller ticket sizes). 
Title: Re: ADS - Alliance Data Systems
Post by: HJ on July 13, 2018, 08:49:58 AM
Couldn't you guys take your argument somewhere else? Thanks in advance. Some of us are trying to make money. :)

The SYF/WMT thingie is one of the reasons I went with ADS over SYF (that and great capital allocation plus insider ownership and experienced leadership). I think smaller clients are stickier and have less bargaining power (that said, they still have some big accounts that would be bad to lose).

What % of loan receivables and interest income are ADS' top 3 or 5 customers? Experienced leadership + insider O/S + cap allocation holds true for SYF as well btw.

Don't think they disclose it. #1 is L Brands at 16 pct. of Card Service revenue and Ascena #2 at 13 pct. revenue. L Brands expires in 2019, so there's a bit of risk/opportunity (SYF has 20 pct. of total interest/fees up for grabs next year).

Overall the 10 largest customers account for some 52 pct. of revenues in Cards Services, whereas for SYF the five largest account for 53 pct. of total interest and fees.

Can't say definately which model is better, but from a high lever I prefer smaller retailers where ADS also delivers marketings solutions etc.

That said, I also think SYF looks interesting, which brings me to the point about capital allocation, insider ownership and management.

Didn't mean to say that SYF were disadvantaged, but I like how ADS' took advantage of the GFC to buy back shares on the cheap. Few companies did that (SYF wasn't public, so no record).

Not sure how one puts a number on that, but it makes me sleep better at night knowing that if a downturn hits (seems like one is long overdue), the companies I'm invested should be able to gain from it (not all of my investments but AZO, AN and ADS do). It makes it easier to just forget about macro and stay 100 pct. invested.

Also, there's some option value in LoyaltyOne. I think they should sell it if/when they dress it up a bit and it fetches a nice price. With ValueAct onboard I suppose they'll do it if it creates value.

Well made points. 

Counter arguments:  1) Neither L Brands nor Ascena are the healthiest of brands.  Look at their respective stocks.  2) The reason they were able to buy back stock was because they were not regulated as a bank  holding company, so no regulator can tell them what to do with capital when the business looks the scariest.  This structural advantage, however, comes also with disadvantages, prominently the ability to increase funding for receivable growth at a meaningful scale.  At $19 billion receivable, are they kind of at the upper bound of the size of their operation without tapping retail deposit funding, and by extension subjecting themselves to bank holding company regulations?  Previous generation credit card monolines have either been acquired by a bank holding company or became bank holding companies themselves as they got to this scale.  First USA, MBNA, Cap One, and today, Synchrony. 

Don't have a strong view on one stock vs. another.
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on July 17, 2018, 06:02:52 AM
Couldn't you guys take your argument somewhere else? Thanks in advance. Some of us are trying to make money. :)

The SYF/WMT thingie is one of the reasons I went with ADS over SYF (that and great capital allocation plus insider ownership and experienced leadership). I think smaller clients are stickier and have less bargaining power (that said, they still have some big accounts that would be bad to lose).

What % of loan receivables and interest income are ADS' top 3 or 5 customers? Experienced leadership + insider O/S + cap allocation holds true for SYF as well btw.

Don't think they disclose it. #1 is L Brands at 16 pct. of Card Service revenue and Ascena #2 at 13 pct. revenue. L Brands expires in 2019, so there's a bit of risk/opportunity (SYF has 20 pct. of total interest/fees up for grabs next year).

Overall the 10 largest customers account for some 52 pct. of revenues in Cards Services, whereas for SYF the five largest account for 53 pct. of total interest and fees.

Can't say definately which model is better, but from a high lever I prefer smaller retailers where ADS also delivers marketings solutions etc.

That said, I also think SYF looks interesting, which brings me to the point about capital allocation, insider ownership and management.

Didn't mean to say that SYF were disadvantaged, but I like how ADS' took advantage of the GFC to buy back shares on the cheap. Few companies did that (SYF wasn't public, so no record).

Not sure how one puts a number on that, but it makes me sleep better at night knowing that if a downturn hits (seems like one is long overdue), the companies I'm invested should be able to gain from it (not all of my investments but AZO, AN and ADS do). It makes it easier to just forget about macro and stay 100 pct. invested.

Also, there's some option value in LoyaltyOne. I think they should sell it if/when they dress it up a bit and it fetches a nice price. With ValueAct onboard I suppose they'll do it if it creates value.

Well made points. 

Counter arguments:  1) Neither L Brands nor Ascena are the healthiest of brands.  Look at their respective stocks.  2) The reason they were able to buy back stock was because they were not regulated as a bank  holding company, so no regulator can tell them what to do with capital when the business looks the scariest.  This structural advantage, however, comes also with disadvantages, prominently the ability to increase funding for receivable growth at a meaningful scale.  At $19 billion receivable, are they kind of at the upper bound of the size of their operation without tapping retail deposit funding, and by extension subjecting themselves to bank holding company regulations?  Previous generation credit card monolines have either been acquired by a bank holding company or became bank holding companies themselves as they got to this scale.  First USA, MBNA, Cap One, and today, Synchrony. 

Don't have a strong view on one stock vs. another.
I actually came across ADS after I took a long look at L Brands last year while searching the retail sector for stocks that had been hammered by the Amazon-effect. Didn't love the balance sheet and thought it too tricky to select winning brands, so ADS seemed like a nice way to play the space without too much single company risk. I think L Brands will do fine (maybe not as an investment), but either way retail is a tough biz, so ADS' customers will come and go like they always have I think.

Not sure how to handicap the bank risk. Any ideas?
Title: Re: ADS - Alliance Data Systems
Post by: stahleyp on July 27, 2018, 10:02:56 AM
Is it being hit today due to CFO retiring?
Title: Re: ADS - Alliance Data Systems
Post by: Saluki on July 27, 2018, 02:44:53 PM
Is it being hit today due to CFO retiring?

It must be, I did a time restricted  google news seach  and that's the only potentially negative article that has come out in the last 24 hours.
Title: Re: ADS - Alliance Data Systems
Post by: bizaro86 on July 27, 2018, 06:04:28 PM
Could Wal mart switching be affecting the market's  perception of switching costs and their moat?
Title: Re: ADS - Alliance Data Systems
Post by: dbuch on July 31, 2018, 12:04:16 PM
As far as valuation goes, I think ADS seems cheap even if you simply consider it a financial company and forget the tech label which is a red herring. The average bank trades at 1x P/B but is lower growth and P/B is tied to ROE. If your earn 10% ROE and your cost of capital is 8% you should be 1.2x book. If you earn 25% and are expected to maintain that level you should be 3.5x.

ADS bank equity should be around $3.5B this year which I think is worth close to $220/share. All in debt of $17B versus $3B of bank equity is 5.7x which is well capitalized. If you value Epsilon and LoyaltyOne at 10x EBITDA that would be $90 a share or about $310.

Obviously it comes down to what you think happens to the growth of card services. If card services can continue to add portfolios and earn 25-30% ROE's then earnings will continue to rise rapidly every year. If you think L brands or some large retailer blows up and they can't replace the receivables fast enough or delinquencies rise to 9% or smaller retailers no longer see value in their SKU level marketing then the higher P/B doesn't make sense.
Title: Re: ADS - Alliance Data Systems
Post by: flesh on October 18, 2018, 10:48:38 AM
From the recent earnings presentation: Card Services

• YTD:
• IKEA – home décor
• Wyndham – hospitality
• Academy Sports – sporting goods
• Floor & Decor – home décor
• Adorama – consumer electronics (store/e-commerce)
• Appliances Connection – consumer electronics (e-commerce)

Announced signing of $2.0 billion vintage plus signed-not-yet-announced of $2.0 billion vintage puts 2018 at $4 billion vintage (2x recent record years)

• 100 percent away from mall-based specialty apparel

• Credit quality continues to improve
• Q1: 6.7 percent → Q2: 6.4 percent → Q3: 5.9 percent
Recovery rate: Q1: ~9 percent → Q2: ~15 percent → Q3: ~18 percent (higher than Q3, 2017 rate)

• Strategic Review of Businesses
• We believe current stock price does not reflect intrinsic value of our business
• We are evaluating which assets could thrive under a different steward, while also unlocking value for
stockholders
• We will have a crystallized game plan of “what & how” before year-end and will communicate this path at that time
• Overall, this will be an aggressive and significant effort

Aggressively prune clients in liquidation, bankruptcy or M&A
• ~50 percent already addressed; remainder to be addressed in fourth quarter
• Eliminates drag over next two years and frees up regulatory capital
• No renewal risk in 2019 safeguards our base

^^^The slate is being cleaned for 19'
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on October 18, 2018, 12:27:05 PM
Didn't think the results were particularly good, but they took a couple of smart steps in how to tell their story. Seems market was surprised by upcoming decision on Epsilion and Loyalty One but they actually said that on a recent investor conference. I was a bit disapointed they didn't announce anything specific as well as continued weakness in Epsilon, but I think both are temporary and card segment looks really strong. They expect to grow mid double digit there, so if they sell off the rest I think it would get a rerating  (plus a shitload of cash).
Title: Re: ADS - Alliance Data Systems
Post by: peterHK on October 18, 2018, 12:46:33 PM
I was also a little disappointed on results. They had said we'd hear about strategic direction on the Q3 call, and their "update" was effectively "more, later. Stay Tuned!".

I still think the company is an interesting special situation play with some catalysts coming up shortly.
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on October 18, 2018, 01:17:56 PM
I was also a little disappointed on results. They had said we'd hear about strategic direction on the Q3 call, and their "update" was effectively "more, later. Stay Tuned!".

I still think the company is an interesting special situation play with some catalysts coming up shortly.
I see it as a GARPy way to play the retail space where you might actually benefit from Amazon (forcing retailers to better know their customers but need to outsource) and you get those options thrown in.
Title: Re: ADS - Alliance Data Systems
Post by: peterHK on October 19, 2018, 01:25:17 PM
I was also a little disappointed on results. They had said we'd hear about strategic direction on the Q3 call, and their "update" was effectively "more, later. Stay Tuned!".

I still think the company is an interesting special situation play with some catalysts coming up shortly.
I see it as a GARPy way to play the retail space where you might actually benefit from Amazon (forcing retailers to better know their customers but need to outsource) and you get those options thrown in.

Question is why do I want to play the retail space (with leverage) right at this point in the cycle with rising rates/potentially slowing economy? I struggle to get above $270/share in value, so for 22% upside over maybe a year it's interesting, but it's not making me salivate really.
Title: Re: ADS - Alliance Data Systems
Post by: abitofvalue on October 19, 2018, 02:34:46 PM
Didn't think the results were particularly good, but they took a couple of smart steps in how to tell their story. Seems market was surprised by upcoming decision on Epsilion and Loyalty One but they actually said that on a recent investor conference. I was a bit disapointed they didn't announce anything specific as well as continued weakness in Epsilon, but I think both are temporary and card segment looks really strong. They expect to grow mid double digit there, so if they sell off the rest I think it would get a rerating  (plus a shitload of cash).

Think the surpirse was the size and timing of divestures not the announcement itself which was somewhat expected.. Not often you have companies say 'major' and 'next few weeks' when it comes to announcements of divestures. That signals something is close to being finalized. Think the market was expecting them to say the typical - "we are going to review strategic options.".  Their comments at conference were not as definitive. In fact just 3 mths back they were saying - Q3 results will resolve credit issue and epsilon underperformance and then if stock remains cheap we will ahve to think about things. I thought their announcement on warnings call moved the timeframe up considerably and implied a big price for the upcoming divestures.

In terms of the quarter - I thought it was actually pretty ordinary. Tax rate and lower provisions were the main reason for the beat vs consensus. Loyalty one only marginally improved on last qtr in terms of core trends... Would have expected the turnaround to have more upside. Epsilon remains a disaster - which likely forced their hand in timing. I suspect absent the announcement shares would have been crushed..
Title: Re: ADS - Alliance Data Systems
Post by: vince on October 20, 2018, 11:41:46 AM
Crushed is right, that's one reason they announced their intentions.  Can anyone take a stab at how much those 2 businesses would sell for with some decent comparables or other recent examples that may shed some light on the multiples they will receive.  I guess all their corporate debt will be attached to the 2 assets they are divesting.  I do know they were offered 6.7 billion for equity and 7.8 billion for EV in 2007.  They have more debt now but every other financial metric is multiples of where it was in 07.  Would love a good sum of the parts analysis from someone that hs paid lots of attention to this one.
Title: Re: ADS - Alliance Data Systems
Post by: flesh on October 20, 2018, 11:54:49 AM
I don't have access but I'd be surprised if there isn't a vic write up very soon considering the last call/clear intentions.

Maybe someone who has instant access can share with us anything interesting when it
pops up?
Title: Re: ADS - Alliance Data Systems
Post by: vince on October 20, 2018, 12:37:49 PM
Like are we talking 9-10 ebitda multiples for those assets or more like 13-14.  The difference in those numbers are night and day because the first 5 billion is going for debt paydown (or maybe not, it's just my understanding) so they will be left with a value for the remaining equity of 10 billion or 6.5 billion (all rough numbers).
Title: Re: ADS - Alliance Data Systems
Post by: abitofvalue on October 20, 2018, 02:21:17 PM
Like are we talking 9-10 ebitda multiples for those assets or more like 13-14.  The difference in those numbers are night and day because the first 5 billion is going for debt paydown (or maybe not, it's just my understanding) so they will be left with a value for the remaining equity of 10 billion or 6.5 billion (all rough numbers).

lots of sell-side firms have done valuations. i think they generally pencil in ~10x for Epsilon. and 5-7x for loyaltyone.  Acxiom marketing services is an interesting recent comp for Epsilon. LoyaltyOne - best comp i can thing of is the Payback program at Amex paid 10x for a few yrs back.  Public market comps for loyaltyone trade at low multiples as most are airline dependent and airlines are pressure partners - see aimia - aircanada or Latam in brazil.
Title: Re: ADS - Alliance Data Systems
Post by: bizaro86 on October 20, 2018, 06:35:25 PM
If loyalty one is available at 5-7x I think they should do an IPO in Canada. I would take an allocation, and at 5x EBITDA for loyalty one I would take a huge allocation (20% position probably). Big moat to that business from network effects, and they aren't beholden to an airline or anyone else, and have been gaining market share.
Title: Re: ADS - Alliance Data Systems
Post by: vince on October 21, 2018, 10:20:58 AM
If loyalty one is available at 5-7x I think they should do an IPO in Canada. I would take an allocation, and at 5x EBITDA for loyalty one I would take a huge allocation (20% position probably). Big moat to that business from network effects, and they aren't beholden to an airline or anyone else, and have been gaining market share.

Totally agree, Air Miles is in almost every house. 
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on October 21, 2018, 10:52:21 AM
I was also a little disappointed on results. They had said we'd hear about strategic direction on the Q3 call, and their "update" was effectively "more, later. Stay Tuned!".

I still think the company is an interesting special situation play with some catalysts coming up shortly.
I see it as a GARPy way to play the retail space where you might actually benefit from Amazon (forcing retailers to better know their customers but need to outsource) and you get those options thrown in.

Question is why do I want to play the retail space (with leverage) right at this point in the cycle with rising rates/potentially slowing economy? I struggle to get above $270/share in value, so for 22% upside over maybe a year it's interesting, but it's not making me salivate really.
Because the story should get a lot clearer, when they've sold off Epsilon and LoyaltyOne and taken advantage of historically good selling conditions. And their numbers should start to look better as inhouse collections fully ramp up. Proceeds can be used for debt paydown or buybacks or plowed into Card segment that sports a ROE of plus 30 pct. and has guided for 24b receivables in 2020... And if things turn south, they've shown before they take advantage of a beaten down share price, so instead of worrying about a mark to market loss, you can chill and enjoy the company working for you - setting you well up for when the tide turns again. No, seriously, if you expect things turn to shit, do it the easy way: Buy it on the bottom and sell when it's gone up... :)
Title: Re: ADS - Alliance Data Systems
Post by: vince on October 21, 2018, 02:53:39 PM
I was also a little disappointed on results. They had said we'd hear about strategic direction on the Q3 call, and their "update" was effectively "more, later. Stay Tuned!".

I still think the company is an interesting special situation play with some catalysts coming up shortly.
I see it as a GARPy way to play the retail space where you might actually benefit from Amazon (forcing retailers to better know their customers but need to outsource) and you get those options thrown in.

Question is why do I want to play the retail space (with leverage) right at this point in the cycle with rising rates/potentially slowing economy? I struggle to get above $270/share in value, so for 22% upside over maybe a year it's interesting, but it's not making me salivate really.
Because the story should get a lot clearer, when they've sold off Epsilon and LoyaltyOne and taken advantage of historically good selling conditions. And their numbers should start to look better as inhouse collections fully ramp up. Proceeds can be used for debt paydown or buybacks or plowed into Card segment that sports a ROE of plus 30 pct. and has guided for 24b receivables in 2020... And if things turn south, they've shown before they take advantage of a beaten down share price, so instead of worrying about a mark to market loss, you can chill and enjoy the company working for you - setting you well up for when the tide turns again. No, seriously, if you expect things turn to shit, do it the easy way: Buy it on the bottom and sell when it's gone up... :)

I see it the same way kab, the one issue I have is mgmt communications are awfull and many investors think that they are not trustworthy.  Every qtr we are informed of another reason or excuse why things have fallen short (been over 2 years now of unexpected And they always act as if investors should have known or should just trust them.  I have read everything they have put out going back a few years and I am still not sure what their strategy was/is in terms of capital allocation, amount of debt that they are targeting, targets or guidance for how much of their loans would come from deposits vs securitizations (I have even contacted them with questions that were not answered clearly)
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on November 15, 2018, 08:32:20 AM
There is a free writeup on VIC now:
https://www.valueinvestorsclub.com/idea/Alliance_Data_Systems/7508715309#description

This was prior to the last earnings call.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 11:17:15 AM
There is a free writeup on VIC now:
https://www.valueinvestorsclub.com/idea/Alliance_Data_Systems/7508715309#description

This was prior to the last earnings call.

I cannot access it?
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on November 15, 2018, 11:52:22 AM
There is a free writeup on VIC now:
https://www.valueinvestorsclub.com/idea/Alliance_Data_Systems/7508715309#description

This was prior to the last earnings call.

I cannot access it?

You need to be logged in with a free account.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 12:10:14 PM
Thx
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 15, 2018, 12:12:14 PM
KCLarkin,
Thank you for sharing that write-up. It hit the nail on the head. Thesis is spot on.

I think any day now ADS will announce their strategic plan for Non- Cards.

stock makes no sense at today's price!
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 15, 2018, 12:18:14 PM
Oh and L Brands ( ADS' largest customer - 10%) is starting to turn the corner on more positive SSS.

Doesn't hurt

http://investors.lb.com/phoenix.zhtml?c=94854&p=irol-newsArticle&ID=2376182
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 12:37:53 PM
The one from December 27th 2017?
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on November 15, 2018, 12:41:38 PM
Sept 28, 2018
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 01:05:53 PM
Thanks again
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 01:07:47 PM
 Guys I am really trying to put a value on the 2 businesses that they might sell but havent had the time to research comparables and I dont follow those types of businesses.  Anyone here that can shed some light on what these things are worth?
Title: Re: ADS - Alliance Data Systems
Post by: flesh on November 15, 2018, 01:08:42 PM
SoTp, Assuming epsilon sells (not saying it will) at 9x ebitda ttm and Loyaltyone/Brand loyalty at 6x ebitda ttm adding low double digit growth for card services plus card services NTM fcf, Card services today is selling at 3x ev/ebitda and 5.5 NTM fcf.

Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 01:14:09 PM
SoTp, Assuming epsilon sells (not saying it will) at 9x ebitda ttm and Loyaltyone/Brand loyalty at 6x ebitda ttm adding low double digit growth for card services plus card services NTM fcf, Card services today is selling at 3x ev/ebitda and 5.5 NTM fcf.

What are you doing with the debt? Keeping it with ADS stub? Is that appropriate?
Title: Re: ADS - Alliance Data Systems
Post by: flesh on November 15, 2018, 01:17:48 PM
SoTp, Assuming epsilon sells (not saying it will) at 9x ebitda ttm and Loyaltyone/Brand loyalty at 6x ebitda ttm adding low double digit growth for card services plus card services NTM fcf, Card services today is selling at 3x ev/ebitda and 5.5 NTM fcf.

What are you doing with the debt? Keeping it with ADS stub? Is that appropriate?

I am leaving all debt with Card Services stub. Not sure what's appropriate but leaving it with the stub is more not less conservative for a napkin SOTP.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 01:20:18 PM
SoTp, Assuming epsilon sells (not saying it will) at 9x ebitda ttm and Loyaltyone/Brand loyalty at 6x ebitda ttm adding low double digit growth for card services plus card services NTM fcf, Card services today is selling at 3x ev/ebitda and 5.5 NTM fcf.

What are you doing with the debt? Keeping it with ADS stub? Is that appropriate?

I am leaving all debt with Card Services stub. Not sure what's appropriate but leaving it with the stub is more not less conservative for a napkin SOTP.

Dont want to bust your chops but how is the valuation more conservative by keeping debt at ADS?
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 01:25:48 PM
I hold a large position because I like stuff that is trading at 10 times fcf or less and growing, and where the business is sticky, defensible.  I want to make it even larger but am hesitant because I just have no idea what the stub is going to look like.  This mgmt has driven me crazy with their info sharing
Title: Re: ADS - Alliance Data Systems
Post by: flesh on November 15, 2018, 01:55:34 PM
Regarding the where debt goes Vince... there's different ways to consider it. I suggest figuring out what makes sense to you. To my mind= too cheap. Assuming the SOTP happens NTM, divestitures and all, I see 50% gain cy 19 absent economic contraction. That said, it's unlikely everything will be divested NTM, it's just a data point.

I don't like the ceo. Coming from a sales/marketing/psychology background, Ed's character seems to run skin deep, a fantastic facade, if he was my friend I would laugh in his face and call him out on his bullshit. OTOH, it's hard to remain circumspect with your own ego when you make 8 figures. Good news is, the incentives of those involved should dictate the chain of events plus you can lack substance and be skilled in a narrow area.



Title: Re: ADS - Alliance Data Systems
Post by: vince on November 15, 2018, 03:36:48 PM
Regarding the where debt goes Vince... there's different ways to consider it. I suggest figuring out what makes sense to you. To my mind= too cheap. Assuming the SOTP happens NTM, divestitures and all, I see 50% gain cy 19 absent economic contraction. That said, it's unlikely everything will be divested NTM, it's just a data point.

I don't like the ceo. Coming from a sales/marketing/psychology background, Ed's character seems to run skin deep, a fantastic facade, if he was my friend I would laugh in his face and call him out on his bullshit. OTOH, it's hard to remain circumspect with your own ego when you make 8 figures. Good news is, the incentives of those involved should dictate the chain of events plus you can lack substance and be skilled in a narrow area.

Flesh, thanks for the reply.  Yes, absolutely the stock is too cheap but I am trying to understand how cheap pro forma assuming a stand alone cards business.  I do think everything may be divested rather quickly as ceo said they would move quickly....I am not fond of him or his associates either but could you please elaborate on some specific reasons why you dont like him?  Would also be greatly appreciated if you stated your bull case, why is it "too cheap"?  As far as the debt goes I am just under the assumption that it would not stay with cards business and may be a reason why they started deleveraging, might be too much debt attached to the 2 subs when readying for a sale, but there is a good chance I am plain wrong.  Lastly, I like the fact that mgmt owns lots of stock, and they have behaved as such and repurchased large chuncks when it was cheap.  In addition valueact owns lots and is on the board and Glenn Greenberg owns a nice block if I remember correctly.
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 16, 2018, 06:21:10 AM
For those trying to get a rough idea of SOTP:

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

Loyalty One:
Revs     = $ 1.3 B
EBITDA = $ 260 M

Epsilon:
Revs       = $2.3B
EBITDA   = $480 M

Card Services:
Revs      = $4.2B
EBITDA  = $1.35 B
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 08:43:50 AM
For those trying to get a rough idea of SOTP:

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

Loyalty One:
Revs     = $ 1.3 B
EBITDA = $ 260 M

Epsilon:
Revs       = $2.3B
EBITDA   = $480 M

Card Services:
Revs      = $4.2B
EBITDA  = $1.35 B

Thats kind of what i was getting at.  If you pay off all the debt the stub is worth less on a fcf multiple (duh).  If you dont its a screaming buy for levered equity guys.  Now maybe mgmt is saying that the card business is worth at least 15 times and its a decent argument but just shedding those other assets may not convince investors that think 10 times is pretty full for this model.  So I dont see where they get a huge improvement here based on those multiples and attaching all debt to the 2 assets.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 08:53:55 AM
I just want to be clear that I dont care if investors think that a 10 multiple is full value, you wont need multiple expansion on the cards business to get a very good return over next 5 years.  But Im just trying to understand how mgmt can be so confident that the stub will rise dramatically.  I think it may but i wouldnt be talking the way mgmt is
Title: Re: ADS - Alliance Data Systems
Post by: ander on November 16, 2018, 09:09:26 AM
So are people playing for a $240 fair value?  20% upside doesn't seem attractive enough given the possibilities of credit turning more negative. Their adjusted EPS #'s also have a lot of adjustments.

I used to following this company very closely about 6 years ago, but have not followed as closely since. Their track record hasn't been as great overall since then it seems. I'd like to be a buyer here, but I want to make sure there is appropriate upside given the downside risks.



For those trying to get a rough idea of SOTP:

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

Loyalty One:
Revs     = $ 1.3 B
EBITDA = $ 260 M

Epsilon:
Revs       = $2.3B
EBITDA   = $480 M

Card Services:
Revs      = $4.2B
EBITDA  = $1.35 B

Title: Re: ADS - Alliance Data Systems
Post by: kab60 on November 16, 2018, 09:17:45 AM
For those trying to get a rough idea of SOTP:

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

Loyalty One:
Revs     = $ 1.3 B
EBITDA = $ 260 M

Epsilon:
Revs       = $2.3B
EBITDA   = $480 M

Card Services:
Revs      = $4.2B
EBITDA  = $1.35 B

Thats kind of what i was getting at.  If you pay off all the debt the stub is worth less on a fcf multiple (duh).  If you dont its a screaming buy for levered equity guys.  Now maybe mgmt is saying that the card business is worth at least 15 times and its a decent argument but just shedding those other assets may not convince investors that think 10 times is pretty full for this model.  So I dont see where they get a huge improvement here based on those multiples and attaching all debt to the 2 assets.
They don't feel like they get full credit for those segments within ADS, and it seems synergies are very few, so I definately applaud the move. Doesn't really matter where debt ends up - they very much know the optimal capital structures I'm sure. When card services is isolated I don't think a 10xPE is the right multiple considering a plus 30 pct. ROE and double digit growth, but even if it is I think one should do okay. It seems to me they have a tremendous opportunity and have a hugely profitable niche with less competition that say SYF, but we will see.
Title: Re: ADS - Alliance Data Systems
Post by: ander on November 16, 2018, 09:35:35 AM
kab60 - curious why do you say "It seems to me they have a tremendous opportunity and have a hugely profitable niche with less competition that say SYF, but we will see."

I believe they take customers from one another periodically. Though I know they say they have different data, support, etc. but that's what I'd expect them to say - is it real?
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on November 16, 2018, 10:01:58 AM
kab60 - curious why do you say "It seems to me they have a tremendous opportunity and have a hugely profitable niche with less competition that say SYF, but we will see."

I believe they take customers from one another periodically. Though I know they say they have different data, support, etc. but that's what I'd expect them to say - is it real?
I'd read the last couple of writeups on VIC as well as the conference calls to get a better feel for how they differentiate themselves, but ADS are typically going after smaller clients that lack scale to take on a number of jobs inhouse. That's the story and I think the high ROE supports it.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 10:09:48 AM
So are people playing for a $240 fair value?  20% upside doesn't seem attractive enough given the possibilities of credit turning more negative. Their adjusted EPS #'s also have a lot of adjustments.

I used to following this company very closely about 6 years ago, but have not followed as closely since. Their track record hasn't been as great overall since then it seems. I'd like to be a buyer here, but I want to make sure there is appropriate upside given the downside risks.



For those trying to get a rough idea of SOTP:

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

Loyalty One:
Revs     = $ 1.3 B
EBITDA = $ 260 M

Epsilon:
Revs       = $2.3B
EBITDA   = $480 M

Card Services:
Revs      = $4.2B
EBITDA  = $1.35 B


Ander, a true investor would not bank on a re rating or a quick rise in price.  He would look to his starting fcf yield and the potential growth in cash flows.  The increase in multiple, if it happens is icing on the cake.  My initial inquiry was to see how much cash the sales would bring in so I could figure out mt starting fcf equity yield for the card stub
Title: Re: ADS - Alliance Data Systems
Post by: ander on November 16, 2018, 11:25:44 AM
"Ander, a true investor would not bank on a re rating or a quick rise in price." I guess I'm not a true investor ;).

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?



So are people playing for a $240 fair value?  20% upside doesn't seem attractive enough given the possibilities of credit turning more negative. Their adjusted EPS #'s also have a lot of adjustments.

I used to following this company very closely about 6 years ago, but have not followed as closely since. Their track record hasn't been as great overall since then it seems. I'd like to be a buyer here, but I want to make sure there is appropriate upside given the downside risks.



For those trying to get a rough idea of SOTP:

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

Loyalty One:
Revs     = $ 1.3 B
EBITDA = $ 260 M

Epsilon:
Revs       = $2.3B
EBITDA   = $480 M

Card Services:
Revs      = $4.2B
EBITDA  = $1.35 B


Ander, a true investor would not bank on a re rating or a quick rise in price.  He would look to his starting fcf yield and the potential growth in cash flows.  The increase in multiple, if it happens is icing on the cake.  My initial inquiry was to see how much cash the sales would bring in so I could figure out mt starting fcf equity yield for the card stub
Title: Re: ADS - Alliance Data Systems
Post by: flesh on November 16, 2018, 11:50:50 AM
I'm perfectly happy with the SOTP posted above. Assuming it plays out that way you have a 10x pe growing double digits. Buybacks would likely be large at that multiple as well. My numbers are a bit higher on 19' NI than theirs. If we hit 240 NTM plus divi's that's fine. From there if we simply get credit for teens growth plus bb's/divi and take advantage of the up and downs in between, that's good enough for me.

Considering all the noise that will be diminishing NTM, I doubt the intrinsic value is being priced in. Causing some spikes here or there. Assuming their book grows as guided, I'd be very surprised not to see a 12x + post noise.

I love how price targets gets adjusted down after the price goes down and vice versa.

The psychology of the appraiser changes and he's partying when it's up and pondering when it's down.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 12:09:48 PM
"Ander, a true investor would not bank on a re rating or a quick rise in price." I guess I'm not a true investor ;).

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?



So are people playing for a $240 fair value?  20% upside doesn't seem attractive enough given the possibilities of credit turning more negative. Their adjusted EPS #'s also have a lot of adjustments.

I used to following this company very closely about 6 years ago, but have not followed as closely since. Their track record hasn't been as great overall since then it seems. I'd like to be a buyer here, but I want to make sure there is appropriate upside given the downside risks.



For those trying to get a rough idea of SOTP:

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

Loyalty One:
Revs     = $ 1.3 B
EBITDA = $ 260 M

Epsilon:
Revs       = $2.3B
EBITDA   = $480 M

Card Services:
Revs      = $4.2B
EBITDA  = $1.35 B


Ander, a true investor would not bank on a re rating or a quick rise in price.  He would look to his starting fcf yield and the potential growth in cash flows.  The increase in multiple, if it happens is icing on the cake.  My initial inquiry was to see how much cash the sales would bring in so I could figure out mt starting fcf equity yield for the card stub

Ander, my bad, I didn't mean to insinuate that but you asked about playing only to a 240 value and I was just trying to describe how that didnt matter to the way I understand valuation.  I will choose my words more carefully
Title: Re: ADS - Alliance Data Systems
Post by: Rasputin on November 16, 2018, 12:11:42 PM
https://www.sec.gov/Archives/edgar/data/1101215/000141881218000092/xslF345X03/primary_doc.xml

ValueAct sold some of their shares to ADS recently
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 16, 2018, 12:13:13 PM
Long term I think this is worth $300 + per share. Yes seriously...

Too much analysis is assuming a static / status quo. I think they have much bigger ambitions than what they currently do. The business will evolve dramatically.

Mgmt quote from Q3 call:

" we expect to be a much larger payments solution outside of private label cards"
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on November 16, 2018, 12:25:09 PM
"Ander, a true investor would not bank on a re rating or a quick rise in price." I guess I'm not a true investor ;).

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?

I would not use an analyst's valuation. They are (almost) always going to use the current stock price as their starting point and adjust their assumptions accordingly.

I think the other poster is saying that the investment merit doesn't depend on a re-rating.

Let's assume that ADS will forever trade at 10x. Will grow receivables at 10% per annum. Reinvest at 20% ROE. Payout the rest as dividends. In that scenario, you would earn 5% yield + 10% growth = 15%. This seems like a good investment even if the stock doesn't re-rate.

---

What you are saying is not wrong, it is just the inverse of what Vince is saying.

Intrinsic Value: Stock is trading at $200 but it is worth $300, so I will buy.
Investment: Projected returns are 15%, so I will buy.

Implicitly, the "investment" view is saying that 10x is not the right price. But it doesn't care what the "right" price is. And you can conveniently ignore the discount rate quagmire.

Personally, I always look at my projected returns from the current price. I never try to calculate the intrinsic value or do a DCF. If I think I can reasonably expect to earn 15%, then I buy. This works well for GARP investments but doesn't work as well for more traditional value investments. In this case, I think there is the opportunity for 15% underlying returns (on the stub) plus a multiple re-rating.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 12:28:42 PM
My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?

I really dont understand the first 2 sentences.  I am simply stating that when you buy something at a 10 times multiple of fcf, and assumimg its growing at least with gdp (without needing much of the 10 percent yield to grow with gdp) you will realize a great return with no re rating, assuming they dont burn any of the fcf.  Now when you find yourself in a situation like that you have a better chance of unloading at a higher multiple because historically a higher than 10 multiple is justified assuming interest rates average less than say 7-8 percent.  So u basically have the luxury of not letting the short run unpredictability of the multiple enter into and cloud your valuation.  Now as far as what I feel a proper multiple is for ADS, I think you could easily get to 15 or more with the growth rates and returns they have keeping in mind this is probably not a 20 multiple business over the longer term.  So to summarize, I dont have a specific answer for you because I don't really know except to say that I feel there is a very high probability that it is worth more than 10 times and a similar probability that it will average a higher multiple than that over next 5 years.  Now if the asset sales produce a 7-8 multiple for the stub, then I will increase my investment, all else equal, hence the initial questions surrounding the values of the 2 subs being sold.  My apologies if I sounded rude, not my intention
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 12:40:48 PM
"Ander, a true investor would not bank on a re rating or a quick rise in price." I guess I'm not a true investor ;).

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?

I would not use an analyst's valuation. They are (almost) always going to use the current stock price as their starting point and adjust their assumptions accordingly.

I think the other poster is saying that the investment merit doesn't depend on a re-rating.

Let's assume that ADS will forever trade at 10x. Will grow receivables at 10% per annum. Reinvest at 20% ROE. Payout the rest as dividends. In that scenario, you would earn 5% yield + 10% growth = 15%. This seems like a good investment even if the stock doesn't re-rate.

---

What you are saying is not wrong, it is just the inverse of what Vince is saying.

Intrinsic Value: Stock is trading at $200 but it is worth $300, so I will buy.
Investment: Projected returns are 15%, so I will buy.

Implicitly, the "investment" view is saying that 10x is not the right price. But it doesn't care what the "right" price is. And you can conveniently ignore the discount rate quagmire.

Personally, I always look at my projected returns from the current price. I never try to calculate the intrinsic value or do a DCF. If I think I can reasonably expect to earn 15%, then I buy. This works well for GARP investments but doesn't work as well for more traditional value investments. In this case, I think there is the opportunity for 15% underlying returns (on the stub) plus a multiple re-rating.

KC, this post is fantastic, agree strongly with everything you wrote, especially the way you describe the projected returns of 15%.  Exactly how I do valuation work and described more fully in my previous post
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 12:51:21 PM
KC, do you find that on average and over time that you do achieve that 15% hurdle?  And if you don't mind maybe share 5 stocks that you like best?  If thats too personal then no worries
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 01:46:40 PM
"Personally, I always look at my projected returns from the current price. I never try to calculate the intrinsic value or do a DCF. If I think I can reasonably expect to earn 15%, then I buy. This works well for GARP investments but doesn't work as well for more traditional value investments. In this case, I think there is the opportunity for 15% underlying returns (on the stub) plus a multiple re-rating."

KC, can you explain why you do not think it works as well for value investments?  The way I see it, you just have to keep ur focus on the relationship between the initial yield and any growth, even if the growth is low or even negative.  If you buy at an 8 multiple then obviously you will still do well with a low single digit growth rate.  I actually like that scenario better sometimes because now your main focus is how defensible their current position is which I think is easier than judging how they will grow, what return they will get on reinvested capital, how much capital will they reinvest and in turn what their growth rate might be.  And I think it explains perfectly when Buffett states that he is perfectly happy with no-low growth as long as the multiple is attractive.  In fact, I have heard him say many times about a current investment that he isnt confident of much unit growth but still likes the investment.  Lastly, the model that you and I have pointed out is why Munger has said that they have never really done a dcf....you dont need to, its implicit in the relationship of those 2 numbers.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 02:45:16 PM
"If we turn to the next slide, which is the average card receivables and the track record. Over the past 7 years, you will see that the portfolio has grown, on average, 20% a year for the past 7 years. And to put that in perspective, if you were to look at the most common proxy used out there, that would be the revolving debt numbers. Revolving debt has moved from about $840 billion to a bit north of $1 trillion. That's about a 3% growth rate over the last 7 years. So clearly, we're growing quite a bit faster than the industry. But at the same time, our return on equity continues to be well above industry levels at 30%-plus. So it's a faster growing model and a more profitable model, and that's what we expect out of cards going forward as well."

Just pulled this from the third qtr call....this is partially what makes me confident of the growth rate...and remember, as long as credit quality stays reasonably good we dont need anything close to those numbers to get the 15% hurdle, and of course with a constant multiple.  What I dont undersand is why more investors dont see wht I see?
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on November 16, 2018, 06:06:57 PM
KC, do you find that on average and over time that you do achieve that 15% hurdle?  And if you don't mind maybe share 5 stocks that you like best?  If thats too personal then no worries

The problem is that those opportunities tend to clump together. In the current market, they are pretty rare and you need to take on more risk. I'm lucky if I find one per year right now. And when I find them, I don't always have cash.

The other thing is you rarely get the smooth 15%. Assuming you are right, the market usually recognizes it and the price appreciates. Then you have the difficult decision of whether to sell or not. A recent example is IBKR. It met my hurdle when it was at $35 but then ran up to $80 where the forward returns were paltry. Do you hold or sell?

Or you could have a situation like ADS where the earnings are growing but the multiple is compressing.
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on November 16, 2018, 06:18:37 PM
KC, can you explain why you do not think it works as well for value investments?  The way I see it, you just have to keep ur focus on the relationship between the initial yield and any growth, even if the growth is low or even negative.

Yes, it works well with any Buffett-style investment. The key thing is that the earnings need to be predictable. Yacktman describes these situations as "equity-bonds" (though I think he got the idea from Buffett).

Negative growth could be okay too but you need good management, otherwise there is a temptation to burn capital.

Glenn Greenberg also uses this concept, so I'm not surprised ADS is a very large position:
https://www.gurufocus.com/news/628326/glenn-greenberg-a-successful-hedge-fund-manager

--
This method doesn't really work well for cigar butts, turnarounds, distressed, or other more traditional value strategies.

Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 07:03:24 PM
KC, can you explain why you do not think it works as well for value investments?  The way I see it, you just have to keep ur focus on the relationship between the initial yield and any growth, even if the growth is low or even negative.

Yes, it works well with any Buffett-style investment. The key thing is that the earnings need to be predictable. Yacktman describes these situations as "equity-bonds" (though I think he got the idea from Buffett).

Negative growth could be okay too but you need good management, otherwise there is a temptation to burn capital.

Glenn Greenberg also uses this concept, so I'm not surprised ADS is a very large position:
https://www.gurufocus.com/news/628326/glenn-greenberg-a-successful-hedge-fund-manager

--
This method doesn't really work well for cigar butts, turnarounds, distressed, or other more traditional value strategies.

I think that is the first time (greenberg article) I have seen anyone in this industry state that their hurdle is based on the sum of those 2 numbers rather than doing a DCF.  Thats why I was so surprised to see you agree with me and further elaborate on it. 
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 07:19:42 PM
KC, do you find that on average and over time that you do achieve that 15% hurdle?  And if you don't mind maybe share 5 stocks that you like best?  If thats too personal then no worries

The problem is that those opportunities tend to clump together. In the current market, they are pretty rare and you need to take on more risk. I'm lucky if I find one per year right now. And when I find them, I don't always have cash.

The other thing is you rarely get the smooth 15%. Assuming you are right, the market usually recognizes it and the price appreciates. Then you have the difficult decision of whether to sell or not. A recent example is IBKR. It met my hurdle when it was at $35 but then ran up to $80 where the forward returns were paltry. Do you hold or sell?

Or you could have a situation like ADS where the earnings are growing but the multiple is compressing.

I'm surprised you are having difficulty finding them, I am finding quite a few despite the higher market multiple.  And it makes sense if you think about how many well regarded professionals have underperformed over last few years, the multiples on their stocks continue to fall.  Now I cheat a bit with that formula in the sense that if the company's earning power, normalized earnings or earnings that will reach that level to make a 10 multiple are developing.  For example, Charter's cash flows are nowhere near 7-8 billion but based on their number of passings, penetration, arpu and normal ebitda per home passed, they are going to get there relatively soon.  I find that I have to go to where the puck will be in order to consistently achieve that 15-20% hurdle.  I also find that the starting yield is way more important in not making mistakes, so if I am wrong about the growth rate, results can still be very good, especially with aggressive buybacks at those 10 multiples.  Plus, with a 10 multiple and no subsequent growth you will almost certainly get some multiple expansion that will lift you towards that 15%. For those reasons I get very confident when a reasonably good business is selling for a 10 multiple or less
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 16, 2018, 07:34:12 PM
Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on November 17, 2018, 10:02:10 AM
Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

I'm not too comfortable with financials, so WAIR, SYF, and KKR wouldn't interest me unless I had some special insight. BAM, AN, ALSN, KMX, ST are stocks that I know. I own BAM. Have looked at the others several times but never pulled the trigger. I've looked at GM but if I wanted an auto I'd probably repurchase FCAU or RACE since I know them better. I already own an airline - it's been unpleasant. Not really comfortable with any of the cable/telco companies.

So you are right, there are many opportunities that pop-up. But all of the ones you listed have some hair on them. They are in cyclical businesses or have complex structures or have lot's of debt or face potential disruption. They are cheap but there are reasons why they are cheap. I own CVS in this category of cheap but hairy. I'm not finding many that I consider no-brainers that meet my 15% hurdle.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 17, 2018, 10:55:53 AM
Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

I'm not too comfortable with financials, so WAIR, SYF, and KKR wouldn't interest me unless I had some special insight. BAM, AN, ALSN, KMX, ST are stocks that I know. I own BAM. Have looked at the others several times but never pulled the trigger. I've looked at GM but if I wanted an auto I'd probably repurchase FCAU or RACE since I know them better. I already own an airline - it's been unpleasant. Not really comfortable with any of the cable/telco companies.

So you are right, there are many opportunities that pop-up. But all of the ones you listed have some hair on them. They are in cyclical businesses or have complex structures or have lot's of debt or face potential disruption. They are cheap but there are reasons why they are cheap. I own CVS in this category of cheap but hairy. I'm not finding many that I consider no-brainers that meet my 15% hurdle.

I admire the discipline and patience, I know how hard those characteristics are to embrace.  Not that it makes a difference based on the rest of your post but wair is a distributor of airline components.  Please take another look at cable, for me Chtr fits the 15% hurdle more than anything else, taking into account risk and timing.  The demand for the network asset  services, the monopoly characteristics, the moat, pricing power of Chtr (they price their bundle 25% less than peers which is extremely hard to do when you know you can price aggressively), Rutledge as operator, Malone as allocator and finally the price.  Reasonable people can disagree about how successful they will be from these levels but there is lots of margin of safety and lots of levers if the future turns out harder.  Read a few of my posts on Charter's board if you change your mind.
Title: Re: ADS - Alliance Data Systems
Post by: maybe4less on November 17, 2018, 01:24:07 PM
Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

I'm not too comfortable with financials, so WAIR, SYF, and KKR wouldn't interest me unless I had some special insight. BAM, AN, ALSN, KMX, ST are stocks that I know. I own BAM. Have looked at the others several times but never pulled the trigger. I've looked at GM but if I wanted an auto I'd probably repurchase FCAU or RACE since I know them better. I already own an airline - it's been unpleasant. Not really comfortable with any of the cable/telco companies.

So you are right, there are many opportunities that pop-up. But all of the ones you listed have some hair on them. They are in cyclical businesses or have complex structures or have lot's of debt or face potential disruption. They are cheap but there are reasons why they are cheap. I own CVS in this category of cheap but hairy. I'm not finding many that I consider no-brainers that meet my 15% hurdle.

I admire the discipline and patience, I know how hard those characteristics are to embrace.  Not that it makes a difference based on the rest of your post but wair is a distributor of airline components.  Please take another look at cable, for me Chtr fits the 15% hurdle more than anything else, taking into account risk and timing.  The demand for the network asset  services, the monopoly characteristics, the moat, pricing power of Chtr (they price their bundle 25% less than peers which is extremely hard to do when you know you can price aggressively), Rutledge as operator, Malone as allocator and finally the price.  Reasonable people can disagree about how successful they will be from these levels but there is lots of margin of safety and lots of levers if the future turns out harder.  Read a few of my posts on Charter's board if you change your mind.

Agree with Vince here on cable. KCLarkin - not sure what gives you pause on cable cos. My guess is potential disruption. IMO, the disruption is more likely to be in the other direction than most people think, i.e., cable companies disrupting mobile operators. Verizon probably buys Charter in the next 5 years as this becomes more clear and the mobile guys need more high capacity fixed infrastructure to compete.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 17, 2018, 01:54:18 PM
Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

I'm not too comfortable with financials, so WAIR, SYF, and KKR wouldn't interest me unless I had some special insight. BAM, AN, ALSN, KMX, ST are stocks that I know. I own BAM. Have looked at the others several times but never pulled the trigger. I've looked at GM but if I wanted an auto I'd probably repurchase FCAU or RACE since I know them better. I already own an airline - it's been unpleasant. Not really comfortable with any of the cable/telco companies.

So you are right, there are many opportunities that pop-up. But all of the ones you listed have some hair on them. They are in cyclical businesses or have complex structures or have lot's of debt or face potential disruption. They are cheap but there are reasons why they are cheap. I own CVS in this category of cheap but hairy. I'm not finding many that I consider no-brainers that meet my 15% hurdle.

I admire the discipline and patience, I know how hard those characteristics are to embrace.  Not that it makes a difference based on the rest of your post but wair is a distributor of airline components.  Please take another look at cable, for me Chtr fits the 15% hurdle more than anything else, taking into account risk and timing.  The demand for the network asset  services, the monopoly characteristics, the moat, pricing power of Chtr (they price their bundle 25% less than peers which is extremely hard to do when you know you can price aggressively), Rutledge as operator, Malone as allocator and finally the price.  Reasonable people can disagree about how successful they will be from these levels but there is lots of margin of safety and lots of levers if the future turns out harder.  Read a few of my posts on Charter's board if you change your mind.

Agree with Vince here on cable. KCLarkin - not sure what gives you pause on cable cos. My guess is potential disruption. IMO, the disruption is more likely to be in the other direction than most people think, i.e., cable companies disrupting mobile operators. Verizon probably buys Charter in the next 5 years as this becomes more clear and the mobile guys need more high capacity fixed infrastructure to compete.

Agreed with wireless and verizon acquisition
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on November 17, 2018, 04:25:53 PM
Agreed with wireless and verizon acquisition

Let's keep this thread about ADS.
Title: Re: ADS - Alliance Data Systems
Post by: ander on November 19, 2018, 01:47:25 PM
Vince: “Ander, my bad, I didn't mean to insinuate that but you asked about playing only to a 240 value and I was just trying to describe how that didnt matter to the way I understand valuation.  I will choose my words more carefully”

Vince – not at all. I’m looking to get to the best answer and different perspectives, approaches, insights, etc. always helpful.



KCLarkin: "What you are saying is not wrong, it is just the inverse of what Vince is saying.

Intrinsic Value: Stock is trading at $200 but it is worth $300, so I will buy.
Investment: Projected returns are 15%, so I will buy.

Implicitly, the "investment" view is saying that 10x is not the right price. But it doesn't care what the "right" price is. And you can conveniently ignore the discount rate quagmire.

Personally, I always look at my projected returns from the current price. I never try to calculate the intrinsic value or do a DCF. If I think I can reasonably expect to earn 15%, then I buy. This works well for GARP investments but doesn't work as well for more traditional value investments. In this case, I think there is the opportunity for 15% underlying returns (on the stub) plus a multiple re-rating."

KCLarkin – I agree, I like finding those situations with a high FCF yield plus growth on those. Can make a lot of money. The reason I think of it on a DCF basis is that it forces me to often think about the out years much more. Agreed though it often gets to the same spot.



Vince: “I really dont understand the first 2 sentences.  I am simply stating that when you buy something at a 10 times multiple of fcf, and assumimg its growing at least with gdp (without needing much of the 10 percent yield to grow with gdp) you will realize a great return with no re rating, assuming they dont burn any of the fcf.”

Vince – I just meant that a multiple of FCF (or a p/e multiple) is a heuristic (or short cut) for a DCF as well. For example, if you’re willing to pay 10x FCF, that the same as a 10% discount rate. DCF of course captures the changes in FCF estimates – though I don’t mean to imply that I’m modeling out to decimal points for false precision but helps me do a reality check often times.



Vince: “Now if the asset sales produce a 7-8 multiple for the stub, then I will increase my investment, all else equal, hence the initial questions surrounding the values of the 2 subs being sold.  My apologies if I sounded rude, not my intention”

Vince – did not sound rude at all – I’m fairly thick-skinned. If your insights help me make money or avoid losing money, I’m happy! If the asset sales produce a stub at 7-8x I’ll be taking a closer look as well.



The main question for me on ADS going forward is whether that card services growth rate is sustainable. In terms of background, I'd invested in the company around 2011 and the stock tripled so was very happy with the outcome. I missed some of the upside when I sold in 2013, but what I liked about Ed (CEO) and Charlie (CFO) back then is that they were delivering on exactly what they said they would be doing. There was a big bear base on them back then too which had been hanging over them - ranging from credit quality to the financial engineering on the warrants they had issued. I exited because I had trouble getting substantial uspide on my future estimates. To get much more upside their TAM (total addressable market) would have to expand substantially beyond what they had guided to and had discussed for years. At the time, I had done diligence by speaking with multiple potential retailers on the card side to size the market and I felt like a lot of the easier opportunity had been addressed. What has happened since then is that they have expanded what they claim their TAM to be and some of that is fair, but their results have been underwhelming over the past few years relative to their guidance -- they may have set too aggressive of targets. My worry is that the TAM is not as large and to try to achieve earnings growth targets, they may have taken lower quality customers -- which would show up in write-offs if there is a downturn. The way they grow their card business is more retailers, more card customers (did they drop their underwriting standards), higher card balances, higher interest rates. As the numbers get larger and the retail environment is tougher, I'd want to get comfortable that the TAM is large enough to support the growth rates on an ongoing basis. Unfortunately private label does not have the wind at it's back like the general cash to card transition is benefitting the V and MA of the world. Just some thoughts. Best.
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 20, 2018, 11:52:11 AM
FYI:
ADS should be making an announcement any day now about value enhancing activities.

Title: Re: ADS - Alliance Data Systems
Post by: vince on November 20, 2018, 01:26:33 PM
FYI:
ADS should be making an announcement any day now about value enhancing activities.

Waiting patiently, but don't know if the market will more or less yawn as they already announced that a significant restructuring is coming soon.  They may even wait until the volatility slows down....heck why don't they wait until the upcoming business slowdown so we get much lower multiple for the assets they are disposing.  Incredible some of the things I have seen very well paid mgmt's do in the last couple years
Title: Re: ADS - Alliance Data Systems
Post by: steph on November 25, 2018, 02:37:03 AM
https://www.sec.gov/Archives/edgar/data/1101215/000141881218000092/xslF345X03/primary_doc.xml

ValueAct sold some of their shares to ADS recently

What do you make of this?  They are on the board and have sold at a loss compared to their last purchase price. Why are they selling to ADS? And why are they selling?
Because they held more than 10%? 

At todays prices I love this stock, but this makes me a bit nervous.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 25, 2018, 10:38:14 AM
https://www.sec.gov/Archives/edgar/data/1101215/000141881218000092/xslF345X03/primary_doc.xml

ValueAct sold some of their shares to ADS recently

What do you make of this?  They are on the board and have sold at a loss compared to their last purchase price. Why are they selling to ADS? And why are they selling?
Because they held more than 10%? 

At todays prices I love this stock, but this makes me a bit nervous.

I have all the same questions as you but it doesnt make me nervous.  If they were selling large chuncks in the open market, that would make me nervous
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 27, 2018, 06:36:04 AM
Alliance Data Exploring Strategic Alternatives For Epsilon:

https://investor.alliancedata.com/news-releases/news-release-details/alliance-data-exploring-strategic-alternatives-epsilonr

Title: Re: ADS - Alliance Data Systems
Post by: BeerBBQ on November 27, 2018, 06:54:54 AM
How is this announcement "aggressive" (term mgmt. used on Q3 call)?

And what is ADS 2.0? air miles and card services?

I would've thought that after a year of strategic review they would, at a minimum, be announcing an actual deal for Episilon...
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 27, 2018, 07:16:21 AM
How is this announcement "aggressive" (term mgmt. used on Q3 call)?

And what is ADS 2.0? air miles and card services?

I would've thought that after a year of strategic review they would, at a minimum, be announcing an actual deal for Episilon...

I didnt expect a deal but did expect some more detail, what a joke.  In all fairness they did talk about 2.0 on the call and they did say that they would move quickly AFTER the announcement but before actively searching for a buyer.  But I definitely agree with you that they look like fools.....again
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on November 27, 2018, 08:14:57 AM
Well, it doesn't really change anything. The most important thing is it fetches a decent price. I'd expect them to divest LoyaltyOne as well later on, but these M&A processes can be quiet disruptive, so I think it's fine to do one deal at a time (and LoyaltyOne probably could use a couple of decent quarters to show it has been turned around). They better move quickly though since it has been very much a sellers market for quiet some time now.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 27, 2018, 09:21:56 AM
Well, it doesn't really change anything. The most important thing is it fetches a decent price. I'd expect them to divest LoyaltyOne as well later on, but these M&A processes can be quiet disruptive, so I think it's fine to do one deal at a time (and LoyaltyOne probably could use a couple of decent quarters to show it has been turned around). They better move quickly though since it has been very much a sellers market for quiet some time now.

I agree it doesn't change anything except maybe another hit to their credibility.  If you read the call it clearly states they will have detail as to what they were going to do with the assets whereas their release shows that they still have no clue.  The manner in which this executive team communicates with it's investors is embarrassing.  And every quarter they apologize for another miscommunication and then do it all over again.  I sold 25% of my position today......another hit to their credibility
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 27, 2018, 09:23:44 AM
Looks like everyone has given up on ADS today & mgmt.
( what have you done for me lately!)

some perspective might be warranted:
This is the same mgmt ( CEO) who helped drive the stock from $50/ share in 2009 to $200 / share in 2018. Not too shabby.

Short term I think traders wanted a sale & stock pop before 2019. So they are all moving on today.

Will be interesting to see if Arlington Value keeps on buying ADS in Q4.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 27, 2018, 09:34:24 AM
Looks like everyone has given up on ADS today & mgmt.
( what have you done for me lately!)

some perspective might be warranted:
This is the same mgmt ( CEO) who helped drive the stock from $50/ share in 2009 to $200 / share in 2018. Not too shabby.

Short term I think traders wanted a sale & stock pop before 2019. So they are all moving on today.

Will be interesting to see if Arlington Value keeps on buying ADS in Q4.

I dont disagree with your premise but measuring their stock price performance from the 2009 crisis might not be the most accurate guage.  And I didnt comment negatively on their performance managing the business, I wouldnt own a large position in it if I didnt think they could realize the potential but they admittedly do a terrible job managing their communications with investors.  Nor do I care for a stock pop, I just want them to take their communications with investors more seriously.  And looks like the market completely agrees....on a day where arguably the stock should have reacted positively, its down pretty significantly
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 27, 2018, 09:47:02 AM
Today's price is a gift.
Short term expectations were not met but doesn't change the long term fundamentals of this biz.
30% ROE trading at under 10 PE (e)
We are large buyers of ADS today.
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on November 27, 2018, 10:38:48 AM
Well, it doesn't really change anything. The most important thing is it fetches a decent price. I'd expect them to divest LoyaltyOne as well later on, but these M&A processes can be quiet disruptive, so I think it's fine to do one deal at a time (and LoyaltyOne probably could use a couple of decent quarters to show it has been turned around). They better move quickly though since it has been very much a sellers market for quiet some time now.

I agree it doesn't change anything except maybe another hit to their credibility.  If you read the call it clearly states they will have detail as to what they were going to do with the assets whereas their release shows that they still have no clue.  The manner in which this executive team communicates with it's investors is embarrassing.  And every quarter they apologize for another miscommunication and then do it all over again.  I sold 25% of my position today......another hit to their credibility
This is the first time they state they're pursuing a sale of the whole of Epsilon. I read a recent Jefferies report (from post Q2 I believe) where they speculated they might only get rid of the agency biz. Pretty clear from the reaction today that most feel the same as you (and boy would a quick sale at a double digit multiple feel good), but I'm not too surprised by the announcement today. With ValueAct involved and management having skin in the game I'm pretty comfortable they're trying to maximize value. That said, I agree their communication could be better, but I think that mainly adds a bit of uncertainty, and I feel we're getting nicely compensated here.
Title: Re: ADS - Alliance Data Systems
Post by: steph on November 27, 2018, 10:50:23 AM
I never believed that they would talk about 'big' news in a couple of weeks if they really were already busy selling Epsilon.  Those things you don't preannounce some weeks in advance.
I would certainly have thought that they would give some more information on their thinking about each division and the ambitions they have. 
But coming out and for the first time confirming that they are looking for a buyer for Epsilon is good news. 
If they hadn't talked about big news coming out , this would in fact be big news.
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on November 27, 2018, 11:29:06 AM
I never believed that they would talk about 'big' news in a couple of weeks if they really were already busy selling Epsilon.  Those things you don't preannounce some weeks in advance.
I would certainly have thought that they would give some more information on their thinking about each division and the ambitions they have. 
But coming out and for the first time confirming that they are looking for a buyer for Epsilon is goo5d news. 
If they hadn't talked about big news coming out , this would in fact be big news.
Agreed it would be very strange if they had preannounced a sale. Which is why I'm also fine they're only adressing Epsilon now. I think it's pretty obvious Loyalty One should be flipped when the metrics look right, but saying these things publicly creates uncertainty internally, and that often leads to some of the best employees leaving.
Title: Re: ADS - Alliance Data Systems
Post by: flesh on November 27, 2018, 02:07:16 PM
AFAIK, the specifics of their intentions in the announcement isn't important because I simply can't know what they intended. Many ways to think about it.

Added at 191 today. Huge position, perfectly willing to sell some with a bump to reduce to large position, all at cap gains.
Title: Re: ADS - Alliance Data Systems
Post by: vince on November 27, 2018, 05:44:29 PM
AFAIK, the specifics of their intentions in the announcement isn't important because I simply can't know what they intended. Many ways to think about it.

Added at 191 today. Huge position, perfectly willing to sell some with a bump to reduce to large position, all at cap gains.

That is probably the best way to make money in this one even though I would like to strangle him
Title: Re: ADS - Alliance Data Systems
Post by: Foreign Tuffett on November 28, 2018, 09:59:03 AM
At first glance selling off the Epsilon division seems like a poor decision. Aren't there significant synergies between Epsilon and Card Services? Don't these synergies provide much of the company's moat?
 

From the last quarterly CC:

"From a technology perspective, regardless of where we wind up on this realignment, we will continue to have the various cousins involved in the card business."

"So for example, providing the technology that drives the loyalty platforms of all of our businesses, whether those assets are within the mothership or sort of outside as a cousin, it’s a pretty straightforward deal, but we will absolutely need to rely on the cousins, for example, the loyalty platform, for example, on the Conversant side, we think that’s going to be a critical new account acquisition tool for us to go out there in the marketplace and source new growth for our customers. So, there will be a number of technology items that will continue to go back and forth between the different divisions, whether some of those assets are within the company or some are out, it’s pretty straightforward in terms of what the services are."
Title: Re: ADS - Alliance Data Systems
Post by: flesh on November 28, 2018, 10:12:23 AM
Just above your quote from ec

"Ed Heffernan

Yes. Now, it’s a good question. We’ve looked at obviously, a lot of this stuff. Fortunately, several years ago, because the retail vertical is so large for us, you’ve heard me talk about building up this mini-Epsilon within cards or sort of 500 of data scientists and analytics and marketing specialists. So from a perspective of what’s already in place within cards, that’s already there. From a technology perspective, regardless of where we wind up on this realignment, we will continue to have the various cousins involved in the card business."


I don't know how much overlap there is at this point. Whatever over lap there is they will likely have some medium term contract in place.

Personally, I'll take the reduced risk from the extra cash even to the small detriment of the company. If we were mid cycle I may feel differently.

OTOH, if the price is high enough, it's a no brainer.
Title: Re: ADS - Alliance Data Systems
Post by: Foreign Tuffett on November 28, 2018, 12:16:28 PM
Just above your quote from ec

"Ed Heffernan

Yes. Now, it’s a good question. We’ve looked at obviously, a lot of this stuff. Fortunately, several years ago, because the retail vertical is so large for us, you’ve heard me talk about building up this mini-Epsilon within cards or sort of 500 of data scientists and analytics and marketing specialists. So from a perspective of what’s already in place within cards, that’s already there. From a technology perspective, regardless of where we wind up on this realignment, we will continue to have the various cousins involved in the card business."


I don't know how much overlap there is at this point. Whatever over lap there is they will likely have some medium term contract in place.

Personally, I'll take the reduced risk from the extra cash even to the small detriment of the company. If we were mid cycle I may feel differently.

OTOH, if the price is high enough, it's a no brainer.

Clearly there's still overlap, but you're right that it isn't immediately clear the degree to which Card Services still relies on Epsilon. While I literally just started researching ADS last night, I'm skeptical that Card Services has replicated the capabilities of Epsilon. Will they be able to sufficiently replicate the capabilities by the time Epsilon is sold? Maybe.

Epsilon is out in the marketplace competing for outside clients. This, at least in theory, means that it has to be efficient and capable. I like the dynamic of it being able to use its expertise, honed in the competitive marketplace, to benefit Card Services. My first impression when I started researching the company is that this dynamic is what sustains ADS' competitive moat.

I agree with you that a rich bid for Epsilon would, at least somewhat, mitigate this entire issue.
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 28, 2018, 12:44:54 PM
Epsilon could fetch a higher multiple than Acxiom
I have a range of $5B- $6.5B for Epsilon alone

Some big customers wins lately too:
Dunkin' Further Integrates With Alliance Data's Epsilon To Modernize Customer Experience
https://www.prnewswire.com/news-releases/dunkin-further-integrates-with-alliance-datas-epsilon-to-modernize-customer-experience-300746292.html
Title: Re: ADS - Alliance Data Systems
Post by: mwtorock on November 29, 2018, 08:08:24 AM
Epsilon could fetch a higher multiple than Acxiom
I have a range of $5B- $6.5B for Epsilon alone

Some big customers wins lately too:
Dunkin' Further Integrates With Alliance Data's Epsilon To Modernize Customer Experience
https://www.prnewswire.com/news-releases/dunkin-further-integrates-with-alliance-datas-epsilon-to-modernize-customer-experience-300746292.html

From transaction multiples, 5B+ makes total sense for Epsilon. Who you think would have the appetite at the moment though? The agencies? PE firms? Wouldn't a spin off be better than a sale for shareholders?
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on November 30, 2018, 07:45:16 AM
Couple items:


Alliance Data to Offer Credit Card Services to Penn National
https://www.prnewswire.com/news-releases/alliance-data-to-launch-co-brand-credit-card-loyalty-program-for-penn-national-gaming-north-americas-largest-regional-gaming-operator-300757390.html

Alliance Data to Participate at the Goldman Sachs U.S. Financial Services Conference 2018
https://www.prnewswire.com/news-releases/alliance-data-to-participate-at-the-goldman-sachs-us-financial-services-conference-2018-300758164.html

Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on December 04, 2018, 12:00:17 PM
Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!
Title: Re: ADS - Alliance Data Systems
Post by: Gregmal on December 04, 2018, 12:06:44 PM
Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!

I agree. The market has gotten filled with stupid participants. By stupid I mean day traders, high frequency, algo's, etf's, etc. Participants void of a fundamental perspective and as such there is a lot of value available. All bodes well for the patient investor with the ability to hold for more than a few weeks/months.
Title: Re: ADS - Alliance Data Systems
Post by: glorysk87 on December 04, 2018, 08:52:29 PM
Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!

That's not what they said.
Title: Re: ADS - Alliance Data Systems
Post by: vince on December 04, 2018, 10:05:16 PM
Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!

That's not what they said.

Close, but he's right, they didn't really say that.  But what he said was encouraging (even though you should take their communications lightly)
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on December 05, 2018, 05:19:29 AM
Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!

That's not what they said.

What did he say then? Do you have a transcript?
Title: Re: ADS - Alliance Data Systems
Post by: cubsfan on December 05, 2018, 05:52:50 AM
Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!

That's not what they said.

What did he say then? Do you have a transcript?


There is a replay available on website. He said after selling Epsilon, they would do what they did in 2009, which was buy back
a lot of stock, when they took out 1/3 of their stock. The intention is there , and likely the capacity might be there. Will it be 1/3? 
Not specific. More like "for example".
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on December 05, 2018, 07:26:08 AM
Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!

That's not what they said.

What did he say then? Do you have a transcript?


There is a replay available on website. He said after selling Epsilon, they would do what they did in 2009, which was buy back
a lot of stock, when they took out 1/3 of their stock. The intention is there , and likely the capacity might be there. Will it be 1/3? 
Not specific. More like "for example".
This. There's a transcript available via Interactive Brokers from Reuters I believe. Lots of good stuff in there.
Title: Re: ADS - Alliance Data Systems
Post by: Rasputin on December 05, 2018, 09:37:22 AM
I'm checking to see if my math is right:

Current share price $189
Shares outstanding 55 million shares
Current market cap $10.4 Billion
Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.
He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

Post Epsilon:
Shares outstanding post 30% buyback 38.6 million shares
CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

Is this post Epsilon sale fcf/sh roughly right?

Thanks!
Title: Re: ADS - Alliance Data Systems
Post by: flesh on December 05, 2018, 10:09:36 AM
I think about it a bit differently, more like, what does it looks like in cy 19/20/21, for example they already have 3.6b cash.

I'm not looking at the numbers now but direction-ally, you'd need to add the interest expense saved on 1.9b. Plus loyalty is under earning, plus if you're looking at cy 19' you could add 15%ish to Card's fcf.
Title: Re: ADS - Alliance Data Systems
Post by: valuedontlie on December 05, 2018, 10:28:02 AM
I'm checking to see if my math is right:

Current share price $189
Shares outstanding 55 million shares
Current market cap $10.4 Billion
Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.
He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

Post Epsilon:
Shares outstanding post 30% buyback 38.6 million shares
CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

Is this post Epsilon sale fcf/sh roughly right?

Thanks!

YTD cash from operations was $2bn and capex at $150m... I'm not sure Epsilon + leakage would account for the delta you are implying (i.e. $680m in FCF)...
Title: Re: ADS - Alliance Data Systems
Post by: Rasputin on December 05, 2018, 10:44:11 AM
Well for financial services company, same like banks, can't really look at cash flow statement.  The cash flow statement adds back provision for loan loss, and include financial transactions like securitization among other things. 

I use fcf because management seems to equate fcf to eps.  FCF is kinda funny term for a credit card company, but I think he equates fcf = ebitda post funding costs - capex - taxes-capital required to grow the portfolio.

I am basically trying to get post Epsilon eps using 2018 business condition.  I understand CEO said he can grow card by 15% per year, but sometimes he refers to "ACTIVES" when talking about the 15% growth and not the whole portfolio, plus this band-aid ripping may result in decline in avg balance.  i'm not sure we can extrapolate $17.5 B by 15% for 2019 and another 15% for 2020.  It could be a decline to a new base from $17.5 B then grow 15% from there?

My first thought right now is I prefer they don't sell Epsilon because the cash flow from Epsilon will help them survive a severe downturn.   

I'm not sure that cash on the balance sheet can be used, it might be there for liquidity coverage requirement?  They have talked about deleveraging through out this year, seem like they would have use that cash to deleverage if it can be used to pay down debt.  Kinda like BAC with its $540 Billion in liquidity.  During the Q3 conference call, they talk about leverage ratio of 2.4 so $5.8 B of debt divided by $2.4 B of ebitda so I don't think they count the cash on the balance sheet against their debt.  They want to lower this 2.4 leverage ratio to 2.2 by year end. 
Title: Re: ADS - Alliance Data Systems
Post by: valuedontlie on December 05, 2018, 10:53:50 AM
Agreed... so TTM "FCF" defined as CFO less capex = ~$2.6bn... provision + capital for growth another $600m as you say gets you near $2bn for all 3 businesses today... also need to consider things like deposits when thinking of funding receivable growth... hard to know what true cash generation is in such a business mix...
Title: Re: ADS - Alliance Data Systems
Post by: no_free_lunch on December 05, 2018, 12:40:55 PM
Can I ask a potentially very stupid question?

Given that this is a financial company, is it not an issue that they have negative tangible book value?   I am okay to overlook that when they company has a solid product and earnings stream (apple, microsoft, danaher) but in this case how do you justify ignoring that metric?
Title: Re: ADS - Alliance Data Systems
Post by: vince on December 05, 2018, 12:42:33 PM
I'm checking to see if my math is right:

Current share price $189
Shares outstanding 55 million shares
Current market cap $10.4 Billion
Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.
He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

Post Epsilon:
Shares outstanding post 30% buyback 38.6 million shares
CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

Is this post Epsilon sale fcf/sh roughly right?

Thanks!

Ras, that is approximately right, fcf multiple goes up a bit but ev/ebitda multiple goes down a bit because they are deleveraging.  Valdontlie 2.6 number is not accurate I dont believe, ebitda pre sale is 2.2-2.3 I think
Title: Re: ADS - Alliance Data Systems
Post by: vince on December 05, 2018, 12:46:15 PM
From the call...Sure. From a leverage perspective, we have some debt out there. There's about $1.9 billion of notes that I'd like to take care of, and that would put our leverage ratio below 2, which I think is certainly very solid. Anything above that, which hopefully will be quite a bit, we will not need to use that to fund any of the card business. Even with growing 15% a year, the card business will throw off $600 million or $700 million of free cash. So even after paying for the capital for that growth, you've got a pretty decent cash machine, which is the payments and cards business. And so if you have a few billion left over, we're going to run the same play that we ran during the Great Recession. The stock was beat up pretty good. And in the middle of the Great Recession, we went out and took out 1/3 of the company. And so I think that's a game plan that we know how to do. That's a game plan that I get excited about. And given sort of the lack of love that's been out there, it's something that would certainly be high on the priority list for us.

So looks like Ras's numbers (and mine) are a little low for fcf...he says 6-700 for cards business but doesnt include Loyalty One
Title: Re: ADS - Alliance Data Systems
Post by: steph on December 05, 2018, 01:10:56 PM
My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying.  They told the CEO they were happy at the actual level and would not sell more.
The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019.  From then on +15% and 2020 +20%.  So, what should have happened in the second half of 2018 is delayed by one year.  It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients.  Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price.
So, all in all a very nice cash machine at a very nice price.  But business has evolved and they have to adapt.   
Title: Re: ADS - Alliance Data Systems
Post by: vince on December 05, 2018, 03:46:26 PM
My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying.  They told the CEO they were happy at the actual level and would not sell more.
The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019.  From then on +15% and 2020 +20%.  So, what should have happened in the second half of 2018 is delayed by one year.  It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients.  Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price.
So, all in all a very nice cash machine at a very nice price.  But business has evolved and they have to adapt.   

It is my opinion that the stock continues to sell off cause we are going on 3 years of mgmt continuing to get shareholders hopes up of better business performance and then falling short.  A couple times it was because they didn't communicate properly and other times they were just dead wrong.  I have witnessed something similar with Mike Fries at Liberty Global, the market does not like it when your optimism is unwarranted and when guidance is wrong.  This time I think it is Valueact forcing them to steer the ship into short term pain and long term gain .  It was only 1 quarter ago that mgmt started talking about pro actively shedding some clients, which I think is very rare and the right thing to do.  But it comes after 2.5 years of shareholders being disappointed.....its just a bad time to take on self inflicted shortfalls but something I think is entirely appropriate.  I can just imagine what the board meetings looked like in the last year......." Jesus Christ Mason, the shareholders are gonna have our freaking heads if we purposely lower our customer base and earnings, we've had subpar performance for 2 years and my bullshitting is working anymore".  "I dont give a damn Edward, you should have just told them the truth all along rather than bullshit them, this way when inevitable short term bad news arrives the shareholders will be understanding"!!
Title: Re: ADS - Alliance Data Systems
Post by: Spekulatius on December 06, 2018, 04:25:56 AM
If it’s just a communication issue, ADS would be a great bargain. I am very sceptical of 15% growth predictions in credit card accounts late in the cycle. Leverage is already pretty high (tangible book is negative as another poster pointed out) and Epsilon has been struggling for a while since 2014 and now it’s top line is shrinking. Is this a melting icecube? 9x EBITDA might be achievable, but a good partner the proceeds will have to go towards debt reduction, IMO. The sale of Epsilon will recur their capacity to carry debt quite a bit.

I don’t see a Slam dunk stock here, but I agree, if you believe the management project on adjusted earnings and growth, this is very cheap here.
Title: Re: ADS - Alliance Data Systems
Post by: WneverLOSE on December 06, 2018, 06:01:38 AM
https://www.bloomberg.com/news/articles/2018-12-06/retailers-embrace-payment-apps-to-sidestep-90-billion-in-swipe-fees

two of the companies highlighted in the article :

https://www.bimnetworks.com/ - tries to do the same as ADS card services without giving credit to customers but by using ACH instead.

https://www.thelevelup.com - uses negotiation power with the networks and focusing on restaurants to provide mobile payments and customer loyalty. (part of Grubhub).
Title: Re: ADS - Alliance Data Systems
Post by: abitofvalue on December 06, 2018, 08:32:22 AM
Haven't their buybacks and acquisitions impacted tangible book value? Not sure it's the right metric for ADS.

$5B for epsilon? Would be nice but is it realistic? I think the market would react very very positively to any number above $3.5B. The challenge is epsilon has been challenged for sometime and buyer knows ADS needs to sell. Also the buyer will likely have to sign a TSA or other long-term contract with card services likely limiting true profitability of epsilon.

Don't understand why they differentiating between active accounts and voluntary cancellations. At the end of the day - revenue depends on total receivables. If you signed shitty retailers that you are now culling, you don't get to pretend they don't exist and growth is actually higher.. the revenue is the the revenue. This massaging of numbers does not help management credibility - which is already low given constant promises of turnarounds and credit mishaps.

Still think their announcement on Q3 call of upcoming strategic announcements was fool hardy given they hadn't even started the sale process.  All it did was raise expectations and further cemented market view that this is a very promitional managemt team that can't be trusted.. bSeems like they were trying to open a window for insider sales by releasing all information they had.

Title: Re: ADS - Alliance Data Systems
Post by: vince on December 06, 2018, 09:05:25 AM
Haven't their buybacks and acquisitions impacted tangible book value? Not sure it's the right metric for ADS.

$5B for epsilon? Would be nice but is it realistic? I think the market would react very very positively to any number above $3.5B. The challenge is epsilon has been challenged for sometime and buyer knows ADS needs to sell. Also the buyer will likely have to sign a TSA or other long-term contract with card services likely limiting true profitability of epsilon.

Don't understand why they differentiating between active accounts and voluntary cancellations. At the end of the day - revenue depends on total receivables. If you signed shitty retailers that you are now culling, you don't get to pretend they don't exist and growth is actually higher.. the revenue is the the revenue. This massaging of numbers does not help management credibility - which is already low given constant promises of turnarounds and credit mishaps.

Still think their announcement on Q3 call of upcoming strategic announcements was fool hardy given they hadn't even started the sale process.  All it did was raise expectations and further cemented market view that this is a very promitional managemt team that can't be trusted.. bSeems like they were trying to open a window for insider sales by releasing all information they had.

Good post Abit, Spec, when they say 15% growth I believe they mean over a period of years.  Kind of hard to fault them for being at the top of the cycle....funny how this 15% is one of the only things that mgmt will be right on imo
Title: Re: ADS - Alliance Data Systems
Post by: vinod1 on December 07, 2018, 06:45:56 AM
My concern is that the recent problems might be symptoms of the fact that it is running out of businesses that are a close market fit for its services.

Why did they target specialty retailers and not some other segment? I would argue it has to do with consumer behavior. Store cards benefit customers (invariably women) who shop frequently at their favorite stores which adds up to significant savings. The cards also benefit retailers who can target these same frequent shoppers to buy more vis targeted marketing.

ADS essentially followed a niche strategy that is based on serving specialty retailers. This is a market they served better than the Citigroup’s and Capital One’s of the world.

The retailers ADS targets have only a transactional relationship with their consumers and hence need ADS to help them with marketing. Online only and digital businesses have a relationship (via an online account) that makes ADS much less useful to them.

Businesses that are not retail are not a good market fit for ADS. They signed up Wyndham this year. I just cannot imagine how a hotel chain could be a good fit. It assumes that people would fly out to a distant city, make a hotel reservation by providing an existing credit card and then apply for the hotel card after they get there. It goes against the grain of how consumers behave. This applies equally well to Digital/eCommerce only businesses.

ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.

If you look at their growth strategy and management has laid this out pretty well. When they onboard a retailer, the 3-4% same store sales growth for the retailer, translates into a 3-4% growth for ADS as well. Now, they typically are starting from zero at the retailer, since the retailer does not have a store card in place. ADS would get this to say 10-20-30% of their customer base and this translated into another 3-4% growth. New retailers who they sign up then generated a further 5-6% growth on top.

The growth math above stops working at some point and the problems facing their end customers (retailers) could mean they are getting closer to that point.

The concern is around management ability to recognize when their business turned into a cash cow and allocate capital appropriately. Management believes they still have a long runaway to growth. So this could be an issue.

Anyway, ADS reminded me of a mistake I made a couple of years ago and the similarities are striking. So I decided to pass up unless I am able to address my concerns mentioned above.

Vinod
Title: Re: ADS - Alliance Data Systems
Post by: vinod1 on December 07, 2018, 06:57:47 AM
At a higher level

1. Having a niche strategy means limiting yourself to a particular market segment. You get to have high returns on capital but the size of your market is small. This is the reason why we do not see Citigroup and Capital One not playing much in this market. They are going after a much larger market.

2. A companies initial customers are going to those would are a good product market fit. As the company grows, the customers are going to be less and less a fit for your product. This increases the marginal costs to serve these customers and reduces the return on capital.

I am trying to figure these out for ADS. Where is the boundary for ADS as far as product market fit is concerned?

Vinod
Title: Re: ADS - Alliance Data Systems
Post by: KCLarkin on December 07, 2018, 08:16:02 AM
ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.

I think your concerns are valid but isn't a better explanation that mall-based retailers are in secular decline? ADS is trying to grow receivables at 15% per year and to do that, they can't be signing up new retailers that are shrinking.
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on December 07, 2018, 09:36:41 AM
vinod1,

You realize that they have digital loyalty cards right?
Go to wafair.com and put something in your cart & try to check out. You'll see an option to save x % by signing up for their loyalty card ( that's ADS ).

Still buying ADS today!
Title: Re: ADS - Alliance Data Systems
Post by: vinod1 on December 07, 2018, 09:46:08 AM
ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.

I think your concerns are valid but isn't a better explanation that mall-based retailers are in secular decline? ADS is trying to grow receivables at 15% per year and to do that, they can't be signing up new retailers that are shrinking.

Just think about the sentence highlighted above.

How can it be good business to turn away customers who are a good fit for your service, just because they cannot grow?

It is like if Microsoft refuses to license HP its Windows 10 OS because HP is had a declining PC sales or say Visa declined to work with Citigroup when they are ramping down their credit card portfolio during the financial crisis. I know the marginal costs are quite different from these examples, but you get my drift.

They can price the product accordingly, but to me at least it does not make much sense.

Vinod
Title: Re: ADS - Alliance Data Systems
Post by: vinod1 on December 07, 2018, 09:50:53 AM
vinod1,

You realize that they have digital loyalty cards right?
Go to wafair.com and put something in your cart & try to check out. You'll see an option to save x % by signing up for their loyalty card ( that's ADS ).

Still buying ADS today!

Yes. You need to look at their competitive advantage and why it works. It does not translate well for digital/online sales.

Sears had eCommerce too :)

Vinod
Title: Re: ADS - Alliance Data Systems
Post by: flesh on December 07, 2018, 09:55:46 AM
 I don't believe we'd see downside here with 5% growth in card, ceteris paribus. There are many moving parts under the rev line that will become clear cy 19.

Title: Re: ADS - Alliance Data Systems
Post by: abitofvalue on December 07, 2018, 10:20:24 AM

Businesses that are not retail are not a good market fit for ADS. They signed up Wyndham this year. I just cannot imagine how a hotel chain could be a good fit. It assumes that people would fly out to a distant city, make a hotel reservation by providing an existing credit card and then apply for the hotel card after they get there. It goes against the grain of how consumers behave. This applies equally well to Digital/eCommerce only businesses.


Vinod


Hotel loyalty credit cards are actually a great business - chase / axp wanted to stay with Marriott and Starwood they agreed to split portfolio post hotel merger.  Why Wyndham chose ADS over the larger guys is an interesting question but I think hotels are well served for loyalty based cards as there is an easy value proposition by way of room upgrades, discount on meals etc..

The historical focus in specialty retail is likely just a function of the history - ADS came out of the limited's credit card business. Over time they grew to add more retailers. Now specialty mall based retail is more challenged so they have changed focus to other segments. Success remains to be seen but early signs suggest clients/consumers are interested in their cards - if anything ADS has said these new programs tend to scale much faster than old mall based concepts - receivable files of $200M in 3 yrs vs $50m under the old system. Not surprising given the retailer is likely also growing much faster than a mall based retailer could open stores and grow.
Title: Re: ADS - Alliance Data Systems
Post by: glorysk87 on December 07, 2018, 05:11:16 PM

Just think about the sentence highlighted above.

How can it be good business to turn away customers who are a good fit for your service, just because they cannot grow?

It is like if Microsoft refuses to license HP its Windows 10 OS because HP is had a declining PC sales or say Visa declined to work with Citigroup when they are ramping down their credit card portfolio during the financial crisis. I know the marginal costs are quite different from these examples, but you get my drift.

They can price the product accordingly, but to me at least it does not make much sense.

Vinod

This makes absolutely no sense. In fact much of what you've said about the company makes absolutely no sense. Microsoft isn't taking on credit risk for each Windows license it sells. If Microsoft sells Windows into a declining PC vendor, they're not at risk of having a large receivables portfolio get hit with a wave of defaults.

It absolutely makes sense for ADS to turn away retailers that are in secular decline. I went through a bunch of your responses in this thread and much of what you've said about this company is at best misguided and at worst just flat out wrong.
Title: Re: ADS - Alliance Data Systems
Post by: vinod1 on December 07, 2018, 07:14:59 PM

Just think about the sentence highlighted above.

How can it be good business to turn away customers who are a good fit for your service, just because they cannot grow?

It is like if Microsoft refuses to license HP its Windows 10 OS because HP is had a declining PC sales or say Visa declined to work with Citigroup when they are ramping down their credit card portfolio during the financial crisis. I know the marginal costs are quite different from these examples, but you get my drift.

They can price the product accordingly, but to me at least it does not make much sense.

Vinod

This makes absolutely no sense. In fact much of what you've said about the company makes absolutely no sense. Microsoft isn't taking on credit risk for each Windows license it sells. If Microsoft sells Windows into a declining PC vendor, they're not at risk of having a large receivables portfolio get hit with a wave of defaults.

It absolutely makes sense for ADS to turn away retailers that are in secular decline. I went through a bunch of your responses in this thread and much of what you've said about this company is at best misguided and at worst just flat out wrong.

The company has very little credit exposure to its clients. It does not lend money to its clients (retailers). It lends money to its clients customers.

I can see why it makes no sense to you when you have fundamentally misunderstood how the company works.

Vinod
Title: Re: ADS - Alliance Data Systems
Post by: vince on December 07, 2018, 08:20:32 PM
My concern is that the recent problems might be symptoms of the fact that it is running out of businesses that are a close market fit for its services.

Why did they target specialty retailers and not some other segment? I would argue it has to do with consumer behavior. Store cards benefit customers (invariably women) who shop frequently at their favorite stores which adds up to significant savings. The cards also benefit retailers who can target these same frequent shoppers to buy more vis targeted marketing.

ADS essentially followed a niche strategy that is based on serving specialty retailers. This is a market they served better than the Citigroup’s and Capital One’s of the world.

The retailers ADS targets have only a transactional relationship with their consumers and hence need ADS to help them with marketing. Online only and digital businesses have a relationship (via an online account) that makes ADS much less useful to them.

Businesses that are not retail are not a good market fit for ADS. They signed up Wyndham this year. I just cannot imagine how a hotel chain could be a good fit. It assumes that people would fly out to a distant city, make a hotel reservation by providing an existing credit card and then apply for the hotel card after they get there. It goes against the grain of how consumers behave. This applies equally well to Digital/eCommerce only businesses.

ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.

If you look at their growth strategy and management has laid this out pretty well. When they onboard a retailer, the 3-4% same store sales growth for the retailer, translates into a 3-4% growth for ADS as well. Now, they typically are starting from zero at the retailer, since the retailer does not have a store card in place. ADS would get this to say 10-20-30% of their customer base and this translated into another 3-4% growth. New retailers who they sign up then generated a further 5-6% growth on top.

The growth math above stops working at some point and the problems facing their end customers (retailers) could mean they are getting closer to that point.

The concern is around management ability to recognize when their business turned into a cash cow and allocate capital appropriately. Management believes they still have a long runaway to growth. So this could be an issue.

Anyway, ADS reminded me of a mistake I made a couple of years ago and the similarities are striking. So I decided to pass up unless I am able to address my concerns mentioned above.

Vinod

Vinod, a couple points....your statement around digital clients sounds like a sensible argument but the fact is every quarter they highlight that their online penetration is higher (roughly 30% if I remember correctly) than the overall online retail penetration rate (15-20% if I remember correctly).  So, at least according to management increasing online sales is a positive to the business model.  Secondly mgmt has emphasized multiple times their addressable market, they call it their "sandbox" and they claim that they can at least double their sales because of it ( Don't recall specific numbers but I do remember it was more than a double).  Thirdly, and this assumes you believe mgmt which isn't the easiest thing to do, their recent sign-ups make it very likely they will grow receivables by more than 15% over next 3 years, including customers lost over same time.  Lastly, KCLarkin is absolutely right when he says it is a rational business decision to shed customers in this case, no question!
Title: Re: ADS - Alliance Data Systems
Post by: glorysk87 on December 08, 2018, 07:34:04 AM

The company has very little credit exposure to its clients. It does not lend money to its clients (retailers). It lends money to its clients customers.

I can see why it makes no sense to you when you have fundamentally misunderstood how the company works.

Vinod

Not even sure how to respond to this profoundly misguided comment. GL.
Title: Re: ADS - Alliance Data Systems
Post by: BeerBBQ on December 10, 2018, 08:04:48 AM
My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying.  They told the CEO they were happy at the actual level and would not sell more.
The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019.  From then on +15% and 2020 +20%.  So, what should have happened in the second half of 2018 is delayed by one year.  It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients.  Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price.
So, all in all a very nice cash machine at a very nice price.  But business has evolved and they have to adapt.   

Is a transcript available somewhere?
Title: Re: ADS - Alliance Data Systems
Post by: kab60 on December 10, 2018, 08:14:48 AM
My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying.  They told the CEO they were happy at the actual level and would not sell more.
The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019.  From then on +15% and 2020 +20%.  So, what should have happened in the second half of 2018 is delayed by one year.  It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients.  Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price.
So, all in all a very nice cash machine at a very nice price.  But business has evolved and they have to adapt.   

Is a transcript available somewhere?
Yep, via Thomson Reuthers (can get it through Interactive Brokers for free - PM if you want it).
Title: Re: ADS - Alliance Data Systems
Post by: LowIQinvestor on December 13, 2018, 08:55:33 AM
I went back over the last 10 years to see various valuation metrics ( PE, Cashflow multiple, P/S, EV/EBITDA )

ADS is currently trading at or below on nearly every metric than it did in the 2008-2009 great recession!


Hope they are buying back shares right now. This is silly
Title: Re: ADS - Alliance Data Systems
Post by: frommi on December 13, 2018, 09:22:50 AM
I went back over the last 10 years to see various valuation metrics ( PE, Cashflow multiple, P/S, EV/EBITDA )

ADS is currently trading at or below on nearly every metric than it did in the 2008-2009 great recession!


Hope they are buying back shares right now. This is silly

Lowest P/E was 5 in 2008/2009 and P/B 2.88. Thats around 120$, so still 30% downside.
Title: Re: ADS - Alliance Data Systems
Post by: brycepeterson on December 13, 2018, 09:47:33 AM
Categorically it's easy to see ADS is cheap today - the whole short-term voting machine of the market has taken it & many other financials down in '18.  My guess is over course of 2019 earnings will prove stable and, with buybacks, will hover back to $200-$275.  One caveat is if you price-in consumer-led recession.  Example - today's 6% reserving in "normal economy" (per mgmt) goes to wherever you think is necessary (8%-10%?) - that would put shares lower - but some of that is being priced-in here ($175-$180). 

My comment is to just be careful using "historical multiples" from abnormal periods.  Comment above mine references 5 PE in '08-'09 and $120 floor (I don't know if 5 PE is true...taking word for it).  Late 2008 to early 2009 was a highly unusual stock price environment, when businesses were trading dirt cheap, thus I would not use that time period as a useful "floor."  Likewise, if analyzing Microsoft or Cisco today, I wouldn't use late 1990's tech bubble multiples to justify a ceiling (unless you're a "financial advisor" trying to earn commission - joking).