ADS - Alliance Data Systems

[vince]

"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?

[KCLarkin]

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.

[KCLarkin]

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.

[vince]

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. 

[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

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

[vince]

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

[KCLarkin]

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.

[vince]

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.

[maybe4less]

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.

[vince]

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