ADS - Alliance Data Systems

[tol1]

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.

[abitofvalue]

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).

[abitofvalue]

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.

[tol1]

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.

[Spekulatius]

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.

[KCLarkin]

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.

[vince]

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.

[tol1]

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.

[vince]

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?

[tol1]

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.