ADS - Alliance Data Systems

[frank87]

How has it "clearly" shown? If you use market tickers as the ultimate judge, then weren't those who bought Bitcoin in the middle of 2017 "clearly" right  at the end of 2017?

ADS may well start growing receivables again, and perhaps at higher rates than SYF given its smaller size. What if its stock outperforms SYF's? Would that "clearly" mean that he was right?

If I am losing 50% On any investment, I am clearly wrong, there no if and when. If nothing else, the timing was wrong and timing, just as well as stock selection, is a critical part of any investment process.

So let me ask you this: is it wrong for someone to not have bought bitcoin in early 2017 and sold out in late 2017 at a 18x gain? Because that's a 18x gain foregone.

Or how about this: is it wrong to have bought B of A at $5 in early 2009? After all, the stock fell another 50% in just a few short weeks thereafter.

By your definition, those were all wrong decisions.

[vince]

How has it "clearly" shown? If you use market tickers as the ultimate judge, then weren't those who bought Bitcoin in the middle of 2017 "clearly" right  at the end of 2017?

ADS may well start growing receivables again, and perhaps at higher rates than SYF given its smaller size. What if its stock outperforms SYF's? Would that "clearly" mean that he was right?

If I am losing 50% On any investment, I am clearly wrong, there no if and when. If nothing else, the timing was wrong and timing, just as well as stock selection, is a critical part of any investment process.

I absolutely agree with Frank here, you can't tell after 1 year.  That 50% rule is a perfectly good way to lose a possible winner.  The only thing that matters is business performance (obviously dependent on price paid relative to earning power) over time.  I have had a few BIG drops and it would have been a HUGE mistake to sell, Cabo 2 years ago comes to mind, it fell to low 600's, check it out.  However, the market is often right so a 50% drop is definitely concerning

[vince]

How has it "clearly" shown? If you use market tickers as the ultimate judge, then weren't those who bought Bitcoin in the middle of 2017 "clearly" right  at the end of 2017?

ADS may well start growing receivables again, and perhaps at higher rates than SYF given its smaller size. What if its stock outperforms SYF's? Would that "clearly" mean that he was right?

If I am losing 50% On any investment, I am clearly wrong, there no if and when. If nothing else, the timing was wrong and timing, just as well as stock selection, is a critical part of any investment process.

In addition, it's impossible to get the timing right consistently, in fact I don't believe it should enter the calculus at all.  The only thing you can really control is your skill in identifying whether the asset is undervalued or not relative to earning power.  Buffett bought the washington post for 20-25% of private value and it got sliced by more than half AFTER he bought it.  Are we to assume his 1000 bagger was bad timing or that he should have sold when it fell significantly after he bought it?  I'm sorry but that makes no sense at all, it may feel like it matters but thats a dangerous feeling when you are investing real money

[NotSoWise]

As per Oct28 SEC filing, it looks like ValueAct sold 3.8m shares in ADS. The question is whether they are going to sell out completely or will do some kind of pref stocks structure so they will remain below 10% after buybacks.
On the other hand, they just converted old pref stocks...

[vince]

As per Oct28 SEC filing, it looks like ValueAct sold 3.8m shares in ADS. The question is whether they are going to sell out completely or will do some kind of pref stocks structure so they will remain below 10% after buybacks.
On the other hand, they just converted old pref stocks...

That's a clear sign to get out imo.  Not that an investor should blindly follow any professional but ValueAct was on the board which decreases the chances of a complete blow-up.  I have to admit that the market was right all along while mgmt was spinning the story.  Yes they have some newer healthier retailers but the legacy business is falling apart and that does not bode well for this business.  I mistakenly assumed that the legacy retailers were healthier and that the the signings of the last few years would more than offset whatever weakness from the legacy retailers.....I am no longer confident of that and ValueActs activities sealed it for me

[NotSoWise]

My thinking is along the lines you pointed out Vince. After the fact it seems that Ed was fed with Melissa's input (indirect) to his quarterly results calls. Last quarter was same as past quarters, the difference being Melissa was directly speaking.

As for ValueAct - being in the Board, they realized the situation is serious and the business (environment) has changed from the time they bought it. Most likely their expected results in this new situation were 1x-1,5x in 5 years from the current price, so they decided to sell and put money elsewhere. So its not going to collapse, but it might be a dog.

I lost a nice 50% on this position and my lesson learned is that I will focus on great businesses at somewhat overvalued prices (hard to buy at fair price). My experience with value plays is that i get them 50% right (random?) and the ones that are doing well are usually 1-3 years behind the schedule.

[kab60]

I understand why people would dump this between lack of management credibility and a sophisticated board member resigning and dumping a huge positon near multiyear lows, but what's the downside here (aside from a huge deteoration in credit, but I haven't seen anything to suggest that and charge-off trends etc. looks fine - it's obviously a risk though).

Looking at the breakup/liquidation value, LoyaltyOne did 254m ebitda in 2018. Let's round that down to 200m and slap a 7-10x multiple on for 1,4-2b.

Then there's some 20b in receivables (2b held for sale) which, if I got this correctly, implies equity at their bank subsidiaries of around 3b.

Now it's obviously not as clear cut as that, but it seems like the value of Loyaltyone and the equity in the receivables portfolio basically covers the market cap. Then there's obviously the debt, but unless credit losses explode or they have to take large writedowns on their credit card receivables shouldn't we be pretty good?

I'm a total bagholder here, and I'm still not sure whether this is a massive thesis drift, but what IF management is right and earnings grown 25-30 pct. next year? I mean, at this valuation they could sell half of their receivables portfolio and just stick with Ulta, Sephora etc. and I don't think it would be expensive. P/E would be higher but so would the growth and a lot of the overhang would probably be lifted (I really wouldn't want them to do that - pretty bad signal to dump your clients to improve optics for shareholders).

[NotSoWise]

After few years at the Board with informal access to management, ValueAct should have developed a view that is probably more insightful than that of outsiders/ public investors (i.e. re market development, IRRs of new portfolios, etc). Despite being cheap (at least it seems so) they must have concluded that returns from the current price point over the next few years are not adequate. So the price may not collapse, but it may stay where it is over the longer term. If ValueAct was confident its 2x over the next 3-4 years, they would have not sold.

Last quarter was a disaster in terms of new management credibility (receivables growth downgrade, EPS downgrade, etc), so what they say about the next year is not worth much. Management will do what they can to take salary as long as possible, including being overoptimistic or not saying everything. In a sh... business, every new quarter they get salary is a win for them.

[stahleyp]

Valueact doesn't know everything. Their 1st /2nd largest holding was BHC in 2015....right before it blew up.

[kab60]

After few years at the Board with informal access to management, ValueAct should have developed a view that is probably more insightful than that of outsiders/ public investors (i.e. re market development, IRRs of new portfolios, etc). Despite being cheap (at least it seems so) they must have concluded that returns from the current price point over the next few years are not adequate. So the price may not collapse, but it may stay where it is over the longer term. If ValueAct was confident its 2x over the next 3-4 years, they would have not sold.

Last quarter was a disaster in terms of new management credibility (receivables growth downgrade, EPS downgrade, etc), so what they say about the next year is not worth much. Management will do what they can to take salary as long as possible, including being overoptimistic or not saying everything. In a sh... business, every new quarter they get salary is a win for them.

You're probably right, but others might be fine with a lower IRR and take a longer term view.

I think it's somewhat meaningless to try and figure out their motives (because we can't, eh?), but either way ValueAct didn't sell into the tender offer, so they're not exactly looking savy.

They basically lost 1/3 of the investment in a couple of months by not selling into the tender.

So either they suddenly had a unique insight (after the stock had plunged), or perhaps they jumped ship because they weren't in agreement with the rest of the board re divestments and possibly a sale of the whole company. It's not inconceivable that ValueAct were pushing for a quick flip to recoup their investment/improve IRR versus holding for plus five years.

I really have no idea, I'm just trying to figure out the downside.