ADS - Alliance Data Systems

[frank87]

Back in 2007, Blackstone offered to pay 20 times, then EPS of ~$4, for this business and now we’re in doubt if it’s worth ~6 times 2019 EPS or if it’s even a going concern? All while, they are projecting, 2019 EOY target $20B receivable. Buying back share aggressively. Close to 25% receivable yield, net adjusted Q2 2019 EBIDTA margin of over 20%, mid teen growth guidance on these new verticals receivables and market is offering it for ~5 times Net Adj EBITDA margin and 16% earning yield. Very interesting…

The fact that it is trading at these levels (and continues to drop), suggests that the Market doubts that current earnings are sustainable. And the narrative is going to fit the current market price. Sometimes the market is right. Sometimes it is not (see AXP circa 2016).

It still seems like a no-brainer to me, but the situation is pretty dynamic. ADS needs to ramp up new vintages faster than its legacy retailers die. Right now, it is treading water. Those who have a large allocation need to acknowledge the risk that this is a value trap.

Valueact and Greenberg dumping at these levels does not inspire confidence.

I think Valueact converted their shares to Preferred.

The preferred that Valueact got doesn't pay dividends either so its chief value comes in the conversion privilege into common stock.

[KCLarkin]

I think the real question that needs to be asked is whether this company adds value to the retailer in ways that the retailer cannot otherwise achieve cost-effectively on its own. If it does, then the company will continue to grow.

The general consensus is that ADS does provide significant value. But if mall-based retailers continue to shutter, this might not matter. L Brands recent stock price is not encouraging. A secondary issue is whether 30% ROEs are sustainable, even if the company can maintain growth.

[KCLarkin]

I think Valueact converted their shares to Preferred.

Yes, you are correct. That makes me feel much better. What else could account for current price action? L Brands sure isn't helping. I wish I knew this company better because it does seem like a no-brainer here.

[glorysk87]

I think there are a few things at play, but I could be wrong. The tender offer created some technical pressure/forced sellers around August 15th. On top of that, you have elevated fears of a cyclical downturn - considering at its core, ADS is a levered subprime credit company, it's going to be one of the first positions that managers sell on cycle fears. The market doesn't want to touch anything that's economically sensitive or has leverage, and ADS has both. So we're seeing the multiple drastically compress. Then finally, you have some pressure from ASNA and LB which are two of the top retailers in ADS' portfolio both spiraling downwards. The combo has crushed the company. Personally, I think for those with the ability to hold a name long-term, if you think the domestic economy is going to hold up, there is reasonable value here.

[frank87]

I think the real question that needs to be asked is whether this company adds value to the retailer in ways that the retailer cannot otherwise achieve cost-effectively on its own. If it does, then the company will continue to grow.

The general consensus is that ADS does provide significant value. But if mall-based retailers continue to shutter, this might not matter. L Brands recent stock price is not encouraging. A secondary issue is whether 30% ROEs are sustainable, even if the company can maintain growth.

It wouldn't matter if ADS is just beholden to mall-based retailer. But its recent signings include plenty of non-mall-based retailers, some of which have pretty strong growth (Burlington, Sephora, Ulta).

As for the ROEs, all credit card banks earn high returns on tangible equity - a quality attained from high NIMs. Even Capital One, whose credit card portfolio comprises just 1/2 of total loans, earns a mid-teens return on tangible equity. Despite high losses, you can argue that credit card interest rates really aren't being appropriately market-priced.

[adhital]

I think there are a few things at play, but I could be wrong. The tender offer created some technical pressure/forced sellers around August 15th. On top of that, you have elevated fears of a cyclical downturn - considering at its core, ADS is a levered subprime credit company, it's going to be one of the first positions that managers sell on cycle fears. The market doesn't want to touch anything that's economically sensitive or has leverage, and ADS has both. So we're seeing the multiple drastically compress. Then finally, you have some pressure from ASNA and LB which are two of the top retailers in ADS' portfolio both spiraling downwards. The combo has crushed the company. Personally, I think for those with the ability to hold a name long-term, if you think the domestic economy is going to hold up, there is reasonable value here.

I think  you're right.

(1) Forced seller post tender
(2) Negative yield spread and it's impact on almost all of the bank names. Its a fear that NIM will compress etc. etc.. which is not entirely accurate
(3) Recent analyst downgrade (Dutche bank) - "potential headwinds includes reserve build, winding down portfolio held for sale"..
(4) market pessimism in general..

On the other hand, 2018 10K and earning ppt states -

" Our client base of more than 2,200 companies consists primarily of large consumer-based businesses, including well-known brands such as Bank of Montreal, Sobeys Inc., Shell Canada Products, Albert Heijn, Bank of America, General Motors, FedEx, Walgreens, Kellogg’s, Citibank, Victoria’s Secret, Wayfair, Signet, IKEA and Ulta..."
"160 private label and co-brand credit card programs generating $16.9 billion in principal receivables from 41.7 million active accounts i.e. $762/account holder."
"2015 to 2019 signings now $5.6 billion in average receivables"
"2015 to 2018 signings grew credit sales at +25 percent year-over-year and +31 percent in average receivables"

I don't think these 160 card program goes to $0 tomorrow..or replace them with DIS, COF, SYF etc. but again who knows..

Even if the new credit sales growth is neutralized by the decline on legacy Porfirio, i.e. no growth or even decline in growth, this is still a massively profitable business. Loyalty one itself is a $20+/share (after tax) business most likely to be sold this year... so card business, which generates close to $25 net adj ebidta, is selling for less then $100/share at this price.... This will be very good learning experience for me if I lose money on this investment..
 

[adhital]

I think Valueact converted their shares to Preferred.

Yes, you are correct. That makes me feel much better. What else could account for current price action? L Brands sure isn't helping. I wish I knew this company better because it does seem like a no-brainer here.

2018 report: "L Brands and its retail affiliates accounted for approximately 10% of our average credit card and loan receivable".
If L Brands goes under, I think the impact is close to $2.5/share in reduced GAAP EPS

[Spekulatius]

Why to buy this vs DFS or COF? Both are cheap, but gave lower ROA, but also less risk. I do think the market is pricing in lower ROI ( from increased competition) and higher loan losses from a weakening economy.

[chompsterama]

I do think the market is pricing in lower ROI ( from increased competition) and higher loan losses from a weakening economy.

Nah, get out of town.

They're all cheap.  If there is no recession coming, take your pick.  ADS might have a greater upside (read more risk) as they have a motivated board and much more likely an acquisition candidate than DFS or COF. 

[abitofvalue]

Curious if ADS has updated their CECL guidance. Even SYF is now out saying 50-60% increase in reserves.  Is ADS sticking to its no material impact line?