ADS - Alliance Data Systems

[abitofvalue]

Ya, the 5-6b they'll get for epsilon and the 3.6b in cash on the bs. Ceo already stated that 1.9 b in debt will be taken out post epsilon sale. Also, ebitda will be going up for remainco due to what I stated in the first post of this thread plus growth.

I think 5-6B for Epsilon is way above what the market is expecting or what their stock price reflects...  Remainco EBITDA will go up but not straight away.. maybe in 2-3 yrs but Epsilon has $450M of EBITDA and the card business is going to be flat to down in the near-term as they roll-off old programs... the new programs take tme to spool.

Think one other item that is underestimated by Bulls is CECL.. management gave perhaps the most bullish(it?) answer when they said they expect minimal impact. Every other card operator excepts reserves to materially increase but for some reason ADS which has higher losses than the GPCC guys is going to have no impact on reserves.. um ok sure.

[Cameron]

Ya, the 5-6b they'll get for epsilon and the 3.6b in cash on the bs. Ceo already stated that 1.9 b in debt will be taken out post epsilon sale. Also, ebitda will be going up for remainco due to what I stated in the first post of this thread plus growth.

I think 5-6B for Epsilon is way above what the market is expecting or what their stock price reflects...  Remainco EBITDA will go up but not straight away.. maybe in 2-3 yrs but Epsilon has $450M of EBITDA and the card business is going to be flat to down in the near-term as they roll-off old programs... the new programs take tme to spool.

Think one other item that is underestimated by Bulls is CECL.. management gave perhaps the most bullish(it?) answer when they said they expect minimal impact. Every other card operator excepts reserves to materially increase but for some reason ADS which has higher losses than the GPCC guys is going to have no impact on reserves.. um ok sure.

They've shown they don't care about under-reserving.

[frommi]

I included the debt of the card business if that is what you wanted to ask, in fact i was lazy and just looked at the numbers from gurufocus. If they sell off epsilon for 5b and use only 2b for debt reduction debt/ebitda will stay roughly the same. Looks still very aggressive to me and since the returns from the receivables are included in ebitda i prefer to look at the whole amount of debt. In 2008 debt/ebitda was way lower.

Net debt is 2.2B. Up from 1.3B in 2008, but not nearly as egregious as your statement implies.

On Net Debt/EBITDA, leverage is slightly below 1.0x right now, compared to 2.2x in 2008.

Sorry if i irritated you, i am just a small guy that is learning slow. I found my mistake after looking into the old 10-K`s. They had a lot of off-balance sheet debt in 2007/2008 that didn`t show up in my data source. I include the debt from the card business because the income is also in the ebitda number. (Asset-backed securities debt – owed to securitization investors)

              2007:     2008:        2012:   2018:

%/revenue
epsilon                20.5%        27.0%    29%
Loyalty                31.5%        25.2%    17%
Credit+Private     47.3%        47.6%    54%


assets:    4162     4357        12000    29763
liabs:      2965     3962        11471    27471
equity:    1197     394          528        2291

ebitda:    632      655          1191      2272

cash:     219       157          893       3600
debt:    1330     2416        6984     13278

off-balance sheet debt:
           3488      3875
net debt:
           4599      6291        6091      9678

debt / ebitda:
            7.27       9.6         5.11       4.25

So in fact they have deleveraged over all and not the other way round.

[Spekulatius]

re leverage - another way to look at the leverage is to look at corporate credit rating. I think ADS corporate credit rating is BA1, which is the highest level of junk grade. For comparison, DFS’s rating is BBB- (lowest investment grade rating), COF is BBB and BAC is BBB+. FWIW, I am a bit surprised that BAC rating isn’t higher. I think the rating  agencies generally get the relative grading within the group (or business sector) correct, although I disagree sometimes on how they rate credit risk in disparate sectors.

[LowIQinvestor]

If we don't go into a massive recession I think ADS is a homerun at today's price!

Market reacting to Card Services Performance Update For November 2018 that was in-line with what they said on last investor call.

Earnings could be cut by 30% and I would still like it here.

[vince]

I do have to agree with Vinod though, that their is a limit to the amount of customers that are in Ads's sandbox.  They have a nice trajectory still for 5 plus years but even according to mgmt statements it is limited after their next double.  That doesnt mean that growth will flatline necessarily but it will definitely not grow at 15% plus as we get closer to that double.  And especially from recent prices this should mean fantastic returns but his point about growth eventually slowing dramatically is right on imo

[glorysk87]

Sorry if i irritated you, i am just a small guy that is learning slow. I found my mistake after looking into the old 10-K`s. They had a lot of off-balance sheet debt in 2007/2008 that didn`t show up in my data source. I include the debt from the card business because the income is also in the ebitda number. (Asset-backed securities debt – owed to securitization investors)

              2007:     2008:        2012:   2018:

%/revenue
epsilon                20.5%        27.0%    29%
Loyalty                31.5%        25.2%    17%
Credit+Private     47.3%        47.6%    54%


assets:    4162     4357        12000    29763
liabs:      2965     3962        11471    27471
equity:    1197     394          528        2291

ebitda:    632      655          1191      2272

cash:     219       157          893       3600
debt:    1330     2416        6984     13278

off-balance sheet debt:
           3488      3875
net debt:
           4599      6291        6091      9678

debt / ebitda:
            7.27       9.6         5.11       4.25

So in fact they have deleveraged over all and not the other way round.

You didn't irritate me, I was just making sure to point out the correct numbers for you.

[Spekulatius]

Looks like Mr Market hates credit card companies now. SYF, DFS,COF, ADS are all down significantly and ADS is down the most, since it is the highest levered.

I looked at DFS annual numbers a few years back and it seems that they also levered a bit up starting in 2016. They also bought back shares like crazy. Current leverage looks Ok, but some of the CC companies may have to stop buying back shares if delinquencies go up and reserves need to be buffed.

[HJ]

I looked at DFS annual numbers a few years back and it seems that they also levered a bit up starting in 2016. They also bought back shares like crazy. Current leverage looks Ok, but some of the CC companies may have to stop buying back shares if delinquencies go up and reserves need to be buffed.

Which company(ies) do you think that has to stop buying back shares?  All consumer finance pure plays (SC, ALLY, SYF, DFS, COF, etc.) are so penalized at this point that valuation is already pricing in a mild recession ala 2001.

[Spekulatius]

I looked at DFS annual numbers a few years back and it seems that they also levered a bit up starting in 2016. They also bought back shares like crazy. Current leverage looks Ok, but some of the CC companies may have to stop buying back shares if delinquencies go up and reserves need to be buffed.

Which company(ies) do you think that has to stop buying back shares?  All consumer finance pure plays (SC, ALLY, SYF, DFS, COF, etc.) are so penalized at this point that valuation is already pricing in a mild recession ala 2001.

I am ny sure whether they have to but DFS seems to have run down their Tier 1 capital ratio by almost 2% points. I doubt they want to go much lower. I guess they can just buy back from continuing earnings, but they probably will have to retain some, if they want to grow their loan book. DFS is BBB- rated and hence barely investment grade. I doubt they want to risk getting into junk credit rating.

I think the market is a bit spooked about CC debt. I think in the last quarter, write offs started to increase, but it’s not clear to me that this is a trend. As far as I know they is some cyclicality in these numbers and they tend to spike early in the year (after Xmas).