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).