ADS - Alliance Data Systems

[ander]

"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

[flesh]

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.

[vince]

"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

[Rasputin]

https://www.sec.gov/Archives/edgar/data/1101215/000141881218000092/xslF345X03/primary_doc.xml

ValueAct sold some of their shares to ADS recently

[LowIQinvestor]

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"

[KCLarkin]

"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.

[vince]

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

[vince]

"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

[vince]

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

[vince]

"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.