ADS - Alliance Data Systems

[cubsfan]

Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!

That's not what they said.

What did he say then? Do you have a transcript?

There is a replay available on website. He said after selling Epsilon, they would do what they did in 2009, which was buy back
a lot of stock, when they took out 1/3 of their stock. The intention is there , and likely the capacity might be there. Will it be 1/3? 
Not specific. More like "for example".

[kab60]

Wow, very surprised that ADS is down on today's conference at Goldman.

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

This stock is insanely mis-priced!

That's not what they said.

What did he say then? Do you have a transcript?

There is a replay available on website. He said after selling Epsilon, they would do what they did in 2009, which was buy back
a lot of stock, when they took out 1/3 of their stock. The intention is there , and likely the capacity might be there. Will it be 1/3? 
Not specific. More like "for example".

This. There's a transcript available via Interactive Brokers from Reuters I believe. Lots of good stuff in there.

[Rasputin]

I'm checking to see if my math is right:

Current share price $189
Shares outstanding 55 million shares
Current market cap $10.4 Billion
Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.
He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

Post Epsilon:
Shares outstanding post 30% buyback 38.6 million shares
CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

Is this post Epsilon sale fcf/sh roughly right?

Thanks!

[flesh]

I think about it a bit differently, more like, what does it looks like in cy 19/20/21, for example they already have 3.6b cash.

I'm not looking at the numbers now but direction-ally, you'd need to add the interest expense saved on 1.9b. Plus loyalty is under earning, plus if you're looking at cy 19' you could add 15%ish to Card's fcf.

[valuedontlie]

I'm checking to see if my math is right:

Current share price $189
Shares outstanding 55 million shares
Current market cap $10.4 Billion
Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.
He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

Post Epsilon:
Shares outstanding post 30% buyback 38.6 million shares
CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

Is this post Epsilon sale fcf/sh roughly right?

Thanks!

YTD cash from operations was $2bn and capex at $150m... I'm not sure Epsilon + leakage would account for the delta you are implying (i.e. $680m in FCF)...

[Rasputin]

Well for financial services company, same like banks, can't really look at cash flow statement.  The cash flow statement adds back provision for loan loss, and include financial transactions like securitization among other things. 

I use fcf because management seems to equate fcf to eps.  FCF is kinda funny term for a credit card company, but I think he equates fcf = ebitda post funding costs - capex - taxes-capital required to grow the portfolio.

I am basically trying to get post Epsilon eps using 2018 business condition.  I understand CEO said he can grow card by 15% per year, but sometimes he refers to "ACTIVES" when talking about the 15% growth and not the whole portfolio, plus this band-aid ripping may result in decline in avg balance.  i'm not sure we can extrapolate $17.5 B by 15% for 2019 and another 15% for 2020.  It could be a decline to a new base from $17.5 B then grow 15% from there?

My first thought right now is I prefer they don't sell Epsilon because the cash flow from Epsilon will help them survive a severe downturn.   

I'm not sure that cash on the balance sheet can be used, it might be there for liquidity coverage requirement?  They have talked about deleveraging through out this year, seem like they would have use that cash to deleverage if it can be used to pay down debt.  Kinda like BAC with its $540 Billion in liquidity.  During the Q3 conference call, they talk about leverage ratio of 2.4 so $5.8 B of debt divided by $2.4 B of ebitda so I don't think they count the cash on the balance sheet against their debt.  They want to lower this 2.4 leverage ratio to 2.2 by year end. 

[valuedontlie]

Agreed... so TTM "FCF" defined as CFO less capex = ~$2.6bn... provision + capital for growth another $600m as you say gets you near $2bn for all 3 businesses today... also need to consider things like deposits when thinking of funding receivable growth... hard to know what true cash generation is in such a business mix...

[no_free_lunch]

Can I ask a potentially very stupid question?

Given that this is a financial company, is it not an issue that they have negative tangible book value?   I am okay to overlook that when they company has a solid product and earnings stream (apple, microsoft, danaher) but in this case how do you justify ignoring that metric?

[vince]

I'm checking to see if my math is right:

Current share price $189
Shares outstanding 55 million shares
Current market cap $10.4 Billion
Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.
He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

Post Epsilon:
Shares outstanding post 30% buyback 38.6 million shares
CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

Is this post Epsilon sale fcf/sh roughly right?

Thanks!

Ras, that is approximately right, fcf multiple goes up a bit but ev/ebitda multiple goes down a bit because they are deleveraging.  Valdontlie 2.6 number is not accurate I dont believe, ebitda pre sale is 2.2-2.3 I think

[vince]

From the call...Sure. From a leverage perspective, we have some debt out there. There's about $1.9 billion of notes that I'd like to take care of, and that would put our leverage ratio below 2, which I think is certainly very solid. Anything above that, which hopefully will be quite a bit, we will not need to use that to fund any of the card business. Even with growing 15% a year, the card business will throw off $600 million or $700 million of free cash. So even after paying for the capital for that growth, you've got a pretty decent cash machine, which is the payments and cards business. And so if you have a few billion left over, we're going to run the same play that we ran during the Great Recession. The stock was beat up pretty good. And in the middle of the Great Recession, we went out and took out 1/3 of the company. And so I think that's a game plan that we know how to do. That's a game plan that I get excited about. And given sort of the lack of love that's been out there, it's something that would certainly be high on the priority list for us.

So looks like Ras's numbers (and mine) are a little low for fcf...he says 6-700 for cards business but doesnt include Loyalty One