ADS - Alliance Data Systems

[Rasputin]

any thoughts on CECL?  If JPM is correct, that credit card reserve will double, it will wipe out 1 year's worth of earnings. 

I wish they would stop using ebitda, core earnings bs...and follow syf.  It bothers me that I can't get some numbers to match  

[HJ]

Credit cards are such short term loans and most card lenders are already reserving for something like 13 months forward looking losses, that CECL impact shouldn't be that big in the current environment.  Car loans and student loans would probably be impacted the most because they have high loss content (relatively) and long duration.  When economy dips and default rate picks up, that's when the combination of CECL and regulatory capital review could have greater impact.  And then all the cost of reporting and estimating this stuff, just to give everybody a sense of false precision.

[Spekulatius]

any thoughts on CECL?  If JPM is correct, that credit card reserve will double, it will wipe out 1 year's worth of earnings. 

I wish they would stop using ebitda, core earnings bs...and follow syf.  It bothers me that I can't get some numbers to match

They need to get a grip and read “The world according to GAAP”.

[kab60]

They will most definately make this a pure card biz, but it's not like we're in a hurry.

Regarding buybacks, these folks run a real business and increasing leverage before cash from Epsilon has arrived would be silly. One, deals can always break. Two, I wouldn't expect a rerating so no need to rush (just look at where it trades now).

It seems a lot of people expect this to trade up when the story is cleaned up, but these guys have signalled their intentions for ages, so I wouldn't expect that.

Bought more today and made it a 25 pct position (more on a cost basis).

I'm not sure it would be as silly as you think, they would still be well under what they claim is the top end of the debt ratio they are comfortable with.  And they do bring in enough cash to delever quickly if the deal fell apart. Not that he's automatically right and not perfectly comparable but Buffett actually increased his position in Delta partly because they did something very similar......and they did it with no influx of extra cash and in a very tough industry.  Again, I could argue that the situations are different, and I agree you add a bit of risk, but imo it is far from silly

Fair point. It wouldn't bother me if they did as you say, but there seems to be a lot of short termism at play, where people expect a quick rerating (from divestments and buybacks). I don't think that will happen, so I don't think there is a rush to buyback even though I obviously think it's cheap. I think a lot of the worries regarding ADS is people fighting the last battle (GFC) and fear massively leveraged consumers and lots of bad credit. I don't think things are so dire, but I don't expect the narrative to change anytime soon since the GFC was so severe (not for ADS though - good nuggets on CC yesterday).

[Broeb22]

Credit cards are such short term loans and most card lenders are already reserving for something like 13 months forward looking losses, that CECL impact shouldn't be that big in the current environment.  Car loans and student loans would probably be impacted the most because they have high loss content (relatively) and long duration.  When economy dips and default rate picks up, that's when the combination of CECL and regulatory capital review could have greater impact.  And then all the cost of reporting and estimating this stuff, just to give everybody a sense of false precision.

As someone who used to work for an auto lender, auto loans have relatively short durations, less than 3 years. Certainly longer duration than credit cards, but among the shorter duration credits out there.

[Rasputin]

https://www.jpmorganchase.com/corporate/investor-relations/document/2019_firm_overview_ba56d0e8.pdf

go to page 19, JPM's credit card reserves coverage is roughly 12 month vs average life of roughly 24 month

[vince]

They will most definately make this a pure card biz, but it's not like we're in a hurry.

Regarding buybacks, these folks run a real business and increasing leverage before cash from Epsilon has arrived would be silly. One, deals can always break. Two, I wouldn't expect a rerating so no need to rush (just look at where it trades now).

It seems a lot of people expect this to trade up when the story is cleaned up, but these guys have signalled their intentions for ages, so I wouldn't expect that.

Bought more today and made it a 25 pct position (more on a cost basis).

I'm not sure it would be as silly as you think, they would still be well under what they claim is the top end of the debt ratio they are comfortable with.  And they do bring in enough cash to delever quickly if the deal fell apart. Not that he's automatically right and not perfectly comparable but Buffett actually increased his position in Delta partly because they did something very similar......and they did it with no influx of extra cash and in a very tough industry.  Again, I could argue that the situations are different, and I agree you add a bit of risk, but imo it is far from silly

Fair point. It wouldn't bother me if they did as you say, but there seems to be a lot of short termism at play, where people expect a quick rerating (from divestments and buybacks). I don't think that will happen, so I don't think there is a rush to buyback even though I obviously think it's cheap. I think a lot of the worries regarding ADS is people fighting the last battle (GFC) and fear massively leveraged consumers and lots of bad credit. I don't think things are so dire, but I don't expect the narrative to change anytime soon since the GFC was so severe (not for ADS though - good nuggets on CC yesterday).

Agreed, both of us have said in previous posts that we don't expect a quick rerating anytime soon regardless of the asset sale nor do I care as long as their competitive position doesn't start to worsen.  And I see no evidence of that.  But I do like a billion dollar buyback at these levels and I'm not so sure it will average these prices over the next 6-12 months.  And I have seen so many times where mgmt lost the opportunity for whatever reason.  But ya, if I had 25% of net worth in it I would absolutely feel the way you do in regards to not borrowing

[vince]

Jeff Ubben just restructured his holdings by trading some of his equity for convertible preferred.  Anyone have any idea what his potential motivations are while he claims that his view of the business has not changed?  He mentioned that with his board seat, complex banking reg's, and strategic initiatives that he felt it was prudent.  That kind of answers my own question but wanted to hear other people chime in.  Thx

[abitofvalue]

Jeff Ubben just restructured his holdings by trading some of his equity for convertible preferred.  Anyone have any idea what his potential motivations are while he claims that his view of the business has not changed?  He mentioned that with his board seat, complex banking reg's, and strategic initiatives that he felt it was prudent.  That kind of answers my own question but wanted to hear other people chime in.  Thx

THey also sold before the Epsilon process was 'officially' launched at $190..  at the time the claim was we like the business and need to get below 10%...   suspect the same thing is happening here except they realize what a sale would look like...  need to stay below 10% for when ADS gets reclassified as a bank to avoid regs but probably recognize selling would crush the stock so trying to do this non-voting convert to remain below 10% voting control post-buybacks.  just a guess..


I dont understand how these guys can claim CECL will not have a large impact..  every other card company says it will.  maybe not 2x like JPM but there is going to be an impact..  silly to say it wont. This will most def lower returns overall for everybody. If you hold more capital on the same loans you end up with lower returns. dont understand why ADS is pretending it can get away without a major impact.. you have a $15-$20B portfolio thats going to see reserves increase by 25-75% on Jan 1, 2020 and then on an ongoing basis you need to reserve 9-12% on new loans..   since they say 6% annual loss rate (assume 1.5-2yr avg life).. vs 6% now. how can it not have an impact?

Suspect - none of this matters. The end game is a sale. I dont think Ed seems himself as a card guy.. they always pushed themselves as marketers and tech.. with Epsilon gone over time i think they are just looking to get out of the whole thing..   

[vince]

Jeff Ubben just restructured his holdings by trading some of his equity for convertible preferred.  Anyone have any idea what his potential motivations are while he claims that his view of the business has not changed?  He mentioned that with his board seat, complex banking reg's, and strategic initiatives that he felt it was prudent.  That kind of answers my own question but wanted to hear other people chime in.  Thx

THey also sold before the Epsilon process was 'officially' launched at $190..  at the time the claim was we like the business and need to get below 10%...   suspect the same thing is happening here except they realize what a sale would look like...  need to stay below 10% for when ADS gets reclassified as a bank to avoid regs but probably recognize selling would crush the stock so trying to do this non-voting convert to remain below 10% voting control post-buybacks.  just a guess..


I dont understand how these guys can claim CECL will not have a large impact..  every other card company says it will.  maybe not 2x like JPM but there is going to be an impact..  silly to say it wont. This will most def lower returns overall for everybody. If you hold more capital on the same loans you end up with lower returns. dont understand why ADS is pretending it can get away without a major impact.. you have a $15-$20B portfolio thats going to see reserves increase by 25-75% on Jan 1, 2020 and then on an ongoing basis you need to reserve 9-12% on new loans..   since they say 6% annual loss rate (assume 1.5-2yr avg life).. vs 6% now. how can it not have an impact?

Suspect - none of this matters. The end game is a sale. I dont think Ed seems himself as a card guy.. they always pushed themselves as marketers and tech.. with Epsilon gone over time i think they are just looking to get out of the whole thing..   

Definitely looking more and more likely that this is the end game.....either way I haven't seen many opportunities (except for extreme market dislocations) to buy rapidly growing businesses with 30% returns on incremental capital selling at this multiple.  By the way does anyone think that there is a company that could more profitably deploy the card business assets within their business model? Is there another company that anyone can think of where synergies are significant and where it makes sense to transfer ownership?  Thx