ADS - Alliance Data Systems

[KCLarkin]

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?

Well, assuming this isn't a value trap:
- they will buy-back a very large portion of the float
- they've signed some very attractive new clients (Ikea, Sephora) that haven't fully ramped up yet. The hope is that the bleeding stops at their legacy accounts and the new accounts ramp-up.

But at current price, you don't need a catalyst. They just need to maintain current earnings and ROE. And then buyback like crazy.

[Spekulatius]

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?

I would argue that ADS right now is recognized by Mr Market correctly. Mr Market has stripped off the premium from phony cash earnings and values the company based on GAAP earnings, just like its peers.

[vince]

I would argue that if the market is in fact valuing ADS correctly it is because of mismanagement and unskillful allocation of capital.  If the market were to value ADS relative to it's peers, it would certainly take into account it's superior historic growth rate at much superior returns on equity.  The market is obviously skeptical on ADS repeating that kind of business performance, partly because of a changing retail landscape and partly because of mismanagement.  Not that it matters but it is my opinion that enough of ADS's unique position remains intact to continue with a good growth rate at good returns AND ultimately a better multiple.  The probability of loss multiplied by potential loss vs probability of gain multiplied by potential gain looks very favorable to me.

[vince]

And in case it looks like I'm harping on mgmt just to agree with recent developments, please take a look at what I have posted on this board regarding mgmt previously.

[dbuch]

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?

I would argue that ADS right now is recognized by Mr Market correctly. Mr Market has stripped off the premium from phony cash earnings and values the company based on GAAP earnings, just like its peers.

I disagree, I think ADS looks very cheap for a 30% ROE company that has grown receivables 14% plus average since 2006. Cash EPS mostly adds back amortization of purchased intangibles. They acquired Conversant for $2.3B which was mostly intangibles assets. With Epsilon gone the delta between "Cash EPS" and GAAP should compress.

We'll see if the management change up helps but I think they mostly sold off on disappointment in the stock repo and the tax leakage, not to mention who wants to own a credit card company exposed to retail with a possible recession coming. SYF, COF and DFS trade at similar multiples but i would argue ADS has a higher ROE and growth profile and should trade at a premium. 

NCOs hit 9.3% in 2009 and 8.9% in 2010 and then dropped to sub 5% for 5 years so they would likely over-earn post a recession but i think a lot of people just don't want to own financials as they assume the next recession looks like the GFC.

[vince]

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?

I would argue that ADS right now is recognized by Mr Market correctly. Mr Market has stripped off the premium from phony cash earnings and values the company based on GAAP earnings, just like its peers.

I disagree, I think ADS looks very cheap for a 30% ROE company that has grown receivables 14% plus average since 2006. Cash EPS mostly adds back amortization of purchased intangibles. They acquired Conversant for $2.3B which was mostly intangibles assets. With Epsilon gone the delta between "Cash EPS" and GAAP should compress.

We'll see if the management change up helps but I think they mostly sold off on disappointment in the stock repo and the tax leakage, not to mention who wants to own a credit card company exposed to retail with a possible recession coming. SYF, COF and DFS trade at similar multiples but i would argue ADS has a higher ROE and growth profile and should trade at a premium. 

NCOs hit 9.3% in 2009 and 8.9% in 2010 and then dropped to sub 5% for 5 years so they would likely over-earn post a recession but i think a lot of people just don't want to own financials as they assume the next recession looks like the GFC.

And if we/you are right about the business, the low stock price is going to ultimately be a blessing.  Looks like Ubben just made room within their ownership percentage to have ADS buy back meaningful amounts of stock without pushing Ubben over 10%

[adhital]

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?

I would argue that ADS right now is recognized by Mr Market correctly. Mr Market has stripped off the premium from phony cash earnings and values the company based on GAAP earnings, just like its peers.

I disagree, I think ADS looks very cheap for a 30% ROE company that has grown receivables 14% plus average since 2006. Cash EPS mostly adds back amortization of purchased intangibles. They acquired Conversant for $2.3B which was mostly intangibles assets. With Epsilon gone the delta between "Cash EPS" and GAAP should compress.

We'll see if the management change up helps but I think they mostly sold off on disappointment in the stock repo and the tax leakage, not to mention who wants to own a credit card company exposed to retail with a possible recession coming. SYF, COF and DFS trade at similar multiples but i would argue ADS has a higher ROE and growth profile and should trade at a premium. 

Can I argue that >30% ROE is because almost double Debt/Equity multiplier compared to SYF or others? If SYF is allowed to double the leverage, can’t they earn 30+% ROE? If yes, what other competitive advantage it has to earn that 30%+ ROE? If not much, then perhaps ADS should be valued in terms of normalized book multiple, e.g.~2x or less,  and that it might drop another 30%. P/E then becomes ~5 this year? Once they lower d/e this year, ROE, P/E and book multiple might normalize as the other financials? May be that's what is happening?

[dbuch]

I would argue that ADS right now is recognized by Mr Market correctly. Mr Market has stripped off the premium from phony cash earnings and values the company based on GAAP earnings, just like its peers.

I think SYF likely does have excess capital and could lever up and maybe generate 30% ROE but they also ran higher charge-offs in the recession (11.26% in '09) and have a more concentrated book. It looks cheap, I just like ADS better. They both have Tier I capital in the 14s so well capitalized. I would still argue they should trade at a higher multiple given they generate 30% ROE, dominate their addressable market and have a long runway of growth. SYF, COF, C etc have huge loan books and compete for the Wal-Marts and Costco's of the world. These large accounts have leverage over the credit cards and demand more in RSAs (revenue sharing agreements). 44% of SYFs book is 5 accounts so they are much more dependent on them (granted they have very long relationships with them). ADS operates in smaller retailers and provides the marketing for them in exchange for near 100% of the economics of the credit card business. 

I think 2x book would be very cheap for these guys. ROE has averaged over 29% since 2008, they hit low teens in 2009 so perhaps lower leverage, higher NCOs etc leads to a lower ROE and the market trades this down to recession levels and they drop to $50-$75 but i think that would be temporary and a huge opportunity. I think the lower leverage gives them a lot of dry powder to add to their receivable book or repo stock which are both very accretive.

[chompsterama]

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?

I would argue that ADS right now is recognized by Mr Market correctly. Mr Market has stripped off the premium from phony cash earnings and values the company based on GAAP earnings, just like its peers.

I disagree, I think ADS looks very cheap for a 30% ROE company that has grown receivables 14% plus average since 2006. Cash EPS mostly adds back amortization of purchased intangibles. They acquired Conversant for $2.3B which was mostly intangibles assets. With Epsilon gone the delta between "Cash EPS" and GAAP should compress.

We'll see if the management change up helps but I think they mostly sold off on disappointment in the stock repo and the tax leakage, not to mention who wants to own a credit card company exposed to retail with a possible recession coming. SYF, COF and DFS trade at similar multiples but i would argue ADS has a higher ROE and growth profile and should trade at a premium. 

Can I argue that >30% ROE is because almost double Debt/Equity multiplier compared to SYF or others? If SYF is allowed to double the leverage, can’t they earn 30+% ROE? If yes, what other competitive advantage it has to earn that 30%+ ROE? If not much, then perhaps ADS should be valued in terms of normalized book multiple, e.g.~2x or less,  and that it might drop another 30%. P/E then becomes ~5 this year? Once they lower d/e this year, ROE, P/E and book multiple might normalize as the other financials? May be that's what is happening?

Why should (seemingly) all financial related businesses trade at some multiple of book value?  I commonly see this argument and I genuinely don't get it.  No one in the tangible world buys an entire business as a going concern based on its multiple of book value.  Profits from now until kingdom come discounted by some rate back to today really does determine the worth of a business.  Going further, why is a PE of 5 reasonable?  A 20% earnings yield in a world of 2% long-term bonds? 

So @adhital are you proposing that a drop in debt will only allow the business to earn half as much as it did last year and therefore a PE of 5 today means a "normalized" PE of 10 without the debt?  How did you get there? 

[frommi]

Why should (seemingly) all financial related businesses trade at some multiple of book value?  I commonly see this argument and I genuinely don't get it.  No one in the tangible world buys an entire business as a going concern based on its multiple of book value.  Profits from now until kingdom come discounted by some rate back to today really does determine the worth of a business.  Going further, why is a PE of 5 reasonable?  A 20% earnings yield in a world of 2% long-term bonds? 

So @adhital are you proposing that a drop in debt will only allow the business to earn half as much as it did last year and therefore a PE of 5 today means a "normalized" PE of 10 without the debt?  How did you get there?

Return on investment is higher for the higher RoE company. If the company with a P/E of 5 reinvests its money at an RoE of 5% after ~10 years it will be worth the same as the company with an RoE of 10% and a P/E of 10, if everything stays the same. Thats typically not the case because of mean reversion, but i think you get the idea?
And of course the higher the leverage the riskier the earnings are and therefore they deserve a discount valuation. P/E`s in isolation are meaningless.