Author Topic: ADS - Alliance Data Systems  (Read 128301 times)

widenthemoat

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Re: ADS - Alliance Data Systems
« Reply #530 on: March 15, 2020, 08:50:22 AM »
Yes, I think that math is directionally correct. There's a rate drop to take into account which should compress NIM in the short term. But like lower gas prices that should be a plus for consumers, lower rates probably means people refi like crazy and get more disposable income all else equal. On the other hand, increased medical costs due to coronavirus will probably be a hit.

I think the consumer not shopping at those dinky retailer ADS serves is a bigger problem than medical costs.

Spekulatius - letís say youíre right, that people stop shopping at these retailers over the next two months. And I mean really stop shopping, letís assume that they do zero credit card sales, online and offline, over the next two months starting today.

Well in that scenario, ADSí current ~$18.0 billion book of receivables, which have principal collections of ~12.5% per month (per their most recent trust data), would be a book of ~$13.0 billion of receivables. Now letís also assume we enter a recession and charge-offs hit ~9.0% (roughly consistent with 2009.) At this point, we are basically breakeven for the banks, and that is assuming zero operational cost cutting from 2019 levels.

After that, things start to normalize and we get back to 7.0% charge-offs (still historically high), and we cut some costs from operation to get back to a level that makes some sense (letís say $1.5 billion of operating expenses, which is 20% higher than ADSí operating costs with a book of ~$14.0 billion of receivables.)

Based on my numbers, that business has about $4.50 of ownerís earnings per share and a substantial amount of cash on the balance sheet. I would venture to say that their book of receivables would grow going forward, but letís assume for stress testingís sake that it doesnít. Well, I would be willing to pay about $45.00 per share to get a 10.0% return on those ownerís earnings into perpetuity, without taking into consideration any return of capital we could potentially receive from the principal collections not being reinvested.

Iím not saying there is no risk - of course there is. It just seems reasonable, and rational, to like the risk vs. reward setup here. My question to the board is this: would the inability to fund new receivables cause the trust to enter early amortization? Iíve been reading through the documents and have not been able to come to a firm conclusion on this yet, any insights would be greatly appreciated.

Thanks,
Dan
« Last Edit: March 15, 2020, 09:10:04 AM by widenthemoat »


abitofvalue

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Re: ADS - Alliance Data Systems
« Reply #531 on: March 15, 2020, 09:56:25 AM »
Does anyone know who this is - ". For example, the contract for one of our 10 largest clients, representing approximately 3% of our consolidated revenue for the year ended December 31, 2019, is effective through September 2020 and is not expected to renew"   

I suspect that more will go this way espicially as SYF signals it is increasingly willing to work with smaller retailers.

Andretta has the right idea but investing in digital capabilities will take time and will be a competitive disadvantage vs SYF, Citi etc. till the catch-up. The lowering of guidance from mid-teens sustainable growth to single digits is a pretty good indicator that they know they signed some uneconomic deals in the past and cant keep doing that. Imo - the notion that those guys dont do 'small' retailers will prove to be a fiction promoted by Ed & co. Andretta already hinted that ADS will need to compete on speed, flexibility..   

All that said yes its cheap. the question is what can it get back to? Its just a mono-line consumer financial company except its subscale, has more subprime, mixed management (lets give Andretta benefit of dount) etc.. so put a 7-10x multiple on GAAP earnings and that's a 'fair value.' but with losses likely heading higher (bye-bye 6% guidance) and receivables growth remaining pressured..



Spekulatius

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Re: ADS - Alliance Data Systems
« Reply #532 on: March 15, 2020, 02:19:27 PM »
Yes, I think that math is directionally correct. There's a rate drop to take into account which should compress NIM in the short term. But like lower gas prices that should be a plus for consumers, lower rates probably means people refi like crazy and get more disposable income all else equal. On the other hand, increased medical costs due to coronavirus will probably be a hit.

I think the consumer not shopping at those dinky retailer ADS serves is a bigger problem than medical costs.

Spekulatius - let’s say you’re right, that people stop shopping at these retailers over the next two months. And I mean really stop shopping, let’s assume that they do zero credit card sales, online and offline, over the next two months starting today.

Well in that scenario, ADS’ current ~$18.0 billion book of receivables, which have principal collections of ~12.5% per month (per their most recent trust data), would be a book of ~$13.0 billion of receivables. Now let’s also assume we enter a recession and charge-offs hit ~9.0% (roughly consistent with 2009.) At this point, we are basically breakeven for the banks, and that is assuming zero operational cost cutting from 2019 levels.

After that, things start to normalize and we get back to 7.0% charge-offs (still historically high), and we cut some costs from operation to get back to a level that makes some sense (let’s say $1.5 billion of operating expenses, which is 20% higher than ADS’ operating costs with a book of ~$14.0 billion of receivables.)

Based on my numbers, that business has about $4.50 of owner’s earnings per share and a substantial amount of cash on the balance sheet. I would venture to say that their book of receivables would grow going forward, but let’s assume for stress testing’s sake that it doesn’t. Well, I would be willing to pay about $45.00 per share to get a 10.0% return on those owner’s earnings into perpetuity, without taking into consideration any return of capital we could potentially receive from the principal collections not being reinvested.

I’m not saying there is no risk - of course there is. It just seems reasonable, and rational, to like the risk vs. reward setup here. My question to the board is this: would the inability to fund new receivables cause the trust to enter early amortization? I’ve been reading through the documents and have not been able to come to a firm conclusion on this yet, any insights would be greatly appreciated.

Thanks,
Dan

You could well be right, your numbers make sense. My response to this one is why is this better than SYF or DFS at this point? The latter are better managed (imo) , have produced cleaner numbers (earnings) and are quite cheap.
« Last Edit: March 19, 2020, 03:05:31 PM by Spekulatius »
Life is too short for cheap beer and wine.

KCLarkin

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Re: ADS - Alliance Data Systems
« Reply #533 on: March 19, 2020, 07:49:27 AM »
Based on price action, I am assuming this is a zero but just happened to see this:

Price:  22.61 USD
Blended P/E:  1.29
Blended Adjusted Earnings Yld: 77.55%
Div Yld:  11.15%

Pretty incredible.

roark33

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Re: ADS - Alliance Data Systems
« Reply #534 on: March 19, 2020, 08:00:09 AM »
I wonder if Mecham is facing redemptions and/or margin call.  If you look at his AUM from his ADV and check that against his portfolio, he has about 1B in AUM (and he said he closed his fund), but has about 1.5B in stock in the 13F, rough numbers.  Obviously, these could be dated, but ADS is down about 80% since last year....

CMPR, ADS, it's not out the realm that he has to meet redemptions end of march and needs to sell this. 

Also SPB is down big.

KCLarkin

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Re: ADS - Alliance Data Systems
« Reply #535 on: March 19, 2020, 08:05:52 AM »
I wonder if Mecham is facing redemptions and/or margin call.  If you look at his AUM from his ADV and check that against his portfolio, he has about 1B in AUM (and he said he closed his fund), but has about 1.5B in stock in the 13F, rough numbers.  Obviously, these could be dated, but ADS is down about 80% since last year....

CMPR, ADS, it's not out the realm that he has to meet redemptions end of march and needs to sell this. 

Also SPB is down big.

Also likes to buy BRK on margin...

roark33

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Re: ADS - Alliance Data Systems
« Reply #536 on: March 19, 2020, 08:07:53 AM »
yeah, I can't see him buying on margin last year, though, just wasn't one of those shooting fish in a barrel type situations, but maybe he did because he thought ADS was such a great deal at 100? 

who knows.

Some hedge funds blew up yesterday, the moves were crazy...across the board. 

widenthemoat

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Re: ADS - Alliance Data Systems
« Reply #537 on: March 19, 2020, 08:13:25 AM »
Based on price action, I am assuming this is a zero but just happened to see this:

Price:  22.61 USD
Blended P/E:  1.29
Blended Adjusted Earnings Yld: 77.55%
Div Yld:  11.15%

Pretty incredible.


KCLarkin - any other reason than price action that makes you think this would be a zero? Hope you're not right but obviously the market thinks you are. It looks like Synchrony is down substantially as well.
« Last Edit: March 19, 2020, 08:16:55 AM by widenthemoat »

KCLarkin

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Re: ADS - Alliance Data Systems
« Reply #538 on: March 19, 2020, 08:23:08 AM »
KCLarkin - any other reason than price action that makes you think this would be a zero? Hope you're not right but obviously the market thinks you are. It looks like Synchrony is down substantially as well.

Not really. There isn't much tangible equity to fallback on if earnings falter though.