ADS - Alliance Data Systems

[adhital]

 Is this is a value trap or an opportunity? With ~50% credit sales conversion as receivable and new verticals growing at ~10% yoy, even with $18 true EPS this year (10% drop), this is trading at 13% earning yield. Even a 20% ROE gives 6% EPS growth with just over 30% reinvestment. PE multiple of 12 gives 15% IRR.
Even if the card revenue drops considerable, like (1) sales/receivable drops – reduced carry balance? Smart consumer?  (2) new verticals signing plus sales growth stalls or drops? (3) increased default rate?  However, I’m not certain these are the likely events given the way IKEA, Ulta and new vertical sales are growing, with all a proprietary AI and data mining expertise this company has, this seems to be a safe 10% yield financials even without any growth.

[glorysk87]

I own it. At this level it's priced for a recession. By my numbers it's essentially pricing in >7.5% NCO's and a >10% decline in receivables the next two years. Downside/upside appears favorable to me. Definitely a bit of a dumpster fire name though.

[ander]

I'm scratching my head though as in I get the reason (i.e., they're likely going to sell loyalty division and you're going to be left with the card business), but doesn't this just seem crazy abrupt - unless if I'm missing something. I known Horn (the CFO) had announced he was leaving and was hanging out until transition, but Heffernan (the CEO) was working on this transition and seems like the board gave him the boot abruptly. Granted they had been missing targets for past couple of years or so. So was the timing of this because there's another shoe to drop, is it because the loyalty division sale is moving along, or something else.

[glorysk87]

I'm scratching my head though as in I get the reason (i.e., they're likely going to sell loyalty division and you're going to be left with the card business), but doesn't this just seem crazy abrupt - unless if I'm missing something. I known Horn (the CFO) had announced he was leaving and was hanging out until transition, but Heffernan (the CEO) was working on this transition and seems like the board gave him the boot abruptly. Granted they had been missing targets for past couple of years or so. So was the timing of this because there's another shoe to drop, is it because the loyalty division sale is moving along, or something else.

Doesn't seem all that crazy. They want to focus the business as a Cards business, thus putting the president of Cards in the CEO chair. Additionally, there has been a lot of criticism from both the buy side and sell side of how Heffernan has managed the strategic review. His communication has been terrible, putting things on the record multiple times that had he had no business putting out there. Those two things, plus the fact that he's presided over a 60% decline in the stock over the past 4 years (keep in mind, that's almost as bad as their performance during the GFC, and that only lasted 2 years peak to trough!) and it's not that surprising that he was replaced.

[Broeb22]

I'm scratching my head though as in I get the reason (i.e., they're likely going to sell loyalty division and you're going to be left with the card business), but doesn't this just seem crazy abrupt - unless if I'm missing something. I known Horn (the CFO) had announced he was leaving and was hanging out until transition, but Heffernan (the CEO) was working on this transition and seems like the board gave him the boot abruptly. Granted they had been missing targets for past couple of years or so. So was the timing of this because there's another shoe to drop, is it because the loyalty division sale is moving along, or something else.

Doesn't seem all that crazy. They want to focus the business as a Cards business, thus putting the president of Cards in the CEO chair. Additionally, there has been a lot of criticism from both the buy side and sell side of how Heffernan has managed the strategic review. His communication has been terrible, putting things on the record multiple times that had he had no business putting out there. Those two things, plus the fact that he's presided over a 60% decline in the stock over the past 4 years (keep in mind, that's almost as bad as their performance during the GFC, and that only lasted 2 years peak to trough!) and it's not that surprising that he was replaced.

Agree with glory. The company is basically de-conglomerating in a sense, so getting rid of a layer of management makes sense, even if most companies don't do it.

[adhital]

I'm scratching my head though as in I get the reason (i.e., they're likely going to sell loyalty division and you're going to be left with the card business), but doesn't this just seem crazy abrupt - unless if I'm missing something. I known Horn (the CFO) had announced he was leaving and was hanging out until transition, but Heffernan (the CEO) was working on this transition and seems like the board gave him the boot abruptly. Granted they had been missing targets for past couple of years or so. So was the timing of this because there's another shoe to drop, is it because the loyalty division sale is moving along, or something else.

Doesn't seem all that crazy. They want to focus the business as a Cards business, thus putting the president of Cards in the CEO chair. Additionally, there has been a lot of criticism from both the buy side and sell side of how Heffernan has managed the strategic review. His communication has been terrible, putting things on the record multiple times that had he had no business putting out there. Those two things, plus the fact that he's presided over a 60% decline in the stock over the past 4 years (keep in mind, that's almost as bad as their performance during the GFC, and that only lasted 2 years peak to trough!) and it's not that surprising that he was replaced.

Agree with glory. The company is basically de-conglomerating in a sense, so getting rid of a layer of management makes sense, even if most companies don't do it.

At the end of the day, trying to please the street by projecting rosy numbers doesn’t really help. I think this is what got him to trouble – CORE vs GAAP, rosy market/growth projections etc. Never he said, “ yes, we are slowing down and we’re trying our best but we cant be sure” . Just look at CACC – they don’t even bother to give pre-quarterly remarks let alone the estimates. Just plain Q&A and they constantly under promise and over deliver. This is what a new CEO at OZM is doing. Keep your heads down and deliver.

Investors are smart and management needs to treat them such. I hope this new CEO is strong as she seems to be. My suggestion: Don’t give any projections. No forecast. Let the number speak by itself.  Focus on getting the clients, work on widening the moat, get the market share. Above all just focus on capital allocation. GAAP EPS and everything else should take care by default.   

[Foreign Tuffett]

Two issues that I think are pertinent, since I see lots of discussion here about selling Loyalty One:

1) Won't they have a big tax tax bill if they sell Loyalty One?

2) Will there be pressure to regulate the entire company as a bank holding company if Loyalty One is disposed of?


I'm surprised that there's not more talk here about Synchrony moving onto ADS' turf. I don't actually think what ADS does is rocket science, and with Epsilon gone competitors might smell blood in the water.

https://www.spglobal.com/marketintelligence/en/news-insights/trending/nci6kxkmhbxrmiypvbscqg2

[KCLarkin]

https://www.spglobal.com/marketintelligence/en/news-insights/trending/nci6kxkmhbxrmiypvbscqg2

Are there any other recent examples of a retailer moving a portfolio away from ADS to a competitor?

[glorysk87]

Two issues that I think are pertinent, since I see lots of discussion here about selling Loyalty One:

1) Won't they have a big tax tax bill if they sell Loyalty One?

2) Will there be pressure to regulate the entire company as a bank holding company if Loyalty One is disposed of?


I'm surprised that there's not more talk here about Synchrony moving onto ADS' turf. I don't actually think what ADS does is rocket science, and with Epsilon gone competitors might smell blood in the water.

https://www.spglobal.com/marketintelligence/en/news-insights/trending/nci6kxkmhbxrmiypvbscqg2

For #1 - no solid answer, but the cost basis is relatively small so yes they'd likely have a tax bill. That's not exactly out of the ordinary though. Particularly if they're positioning the cards business as a standalone so that it's an attractive acquisition target for one of the larger credit card companies.

For #2 - To lose non-bank hold co status the banks would have to either a) grow to over $50B in assets or b) be considered a systemic risk. Neither are likely to occur in any reasonable time frame.

As for SYF moving onto ADS' turf. I'm not sure that's really the case. A lot of times when SYF gains a customer it's because they've gained the scale to do the analytics and loyalty portion in-house, so they feel comfortable leaving ADS and going to SYF so they can earn the RSA which they don't get with ADS. Again though, that's speculation. Unless SYF winning clients off ADS becomes a pattern I wouldn't be too worried.

[decko]

what is the main catalyst for ADS to be recognized by Mr Market?  Is it more bookings (more customers)? Revenue? or just normal bottom line growth?