Author Topic: ADS - Alliance Data Systems  (Read 95523 times)

Ten7suited

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Re: ADS - Alliance Data Systems
« Reply #470 on: November 08, 2019, 02:13:51 PM »
Hi, I appreciate everyone's comments and have read through the entirety of this thread.  Early on in the thread, someone pointed out that there is some detail about the receivables in the filings of the trusts, with extra detail when the trust issues a new note (most recent is $653mn offering called "Series 2019-C asset Backed Notes").  See ][https://www.sec.gov/Archives/edgar/data/1139552/000119312519243894/d794693d424b5.htm#tx794693_101].   The details in the "trust portfolio" section of this prospectus relate to $7.576bn of the average receivables that have been securitized as of 6/30/19 (average for 6 months ended 6/30/19).  However, I'm unable to find similar disclosure about the remaining $5bn or so of total receivables restricted for securitization investors as of 6/30/19 per the 10-Q.  I've searched SEC filings for "World financial network" and "world financial capital", but all the data point to the same group of $7-8bn in receivables.  Has anyone found data on the missing ~$5bn? 

Also of note is page 79 where they discuss "loss experience" in the trust.  I'm having trouble reconciling the pretty significant rise in "net charge-offs as a percentage of average receivables outstanding" with the numbers reported at the parent level.  For example, the trust reports 8.52% net charge-off as % of avg receivables while the parent is reporting 6.1% (both for 2018).  Obviously the former relates to just $7.4bn (as of 12/31/18) worth of receivables and the latter relates to the full $17.4bn, but it seems surprising that the economics would be so different on the $10bn in question.  Any ideas? 

Thanks in advance. 


abitofvalue

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Re: ADS - Alliance Data Systems
« Reply #471 on: November 08, 2019, 11:54:31 PM »
Iirc not all receivables are secured by ABS trusts. They also have equity, Corp debt and most importantly deposits financing a load of receivables.

The NCO difference is as you point out - diff NCO rates in the trust portfolio and remaining.  Yes diff portfolios perform very differently. Look at SYF - Walmart was a 9-10% loss rate portfolio while overall syf is a 6% loss rate portfolio.

abitofvalue

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Re: ADS - Alliance Data Systems
« Reply #472 on: November 09, 2019, 12:44:35 AM »
As for the current valuation I have no clue... On the one hand it looks cheap, but at the same time there is a myriad of reasons why the current price could be the right one (e.g. more reserves to come for old portfolios, lower IRRs for new ones, already high niche real penetration/ market share, further deterioration of retail customers, etc).
I'm still trying to flesh out the bear case. On the last call an analyst triangulated that they took at 60m hit to their portfolios held for sale (2b). I'd assume they're getting rid of their worst clients/portfolios, but even if one assumed all their receivables were impaired, that would be a 600m hit. Hardly threatening. I'd also expect their costs to fund their receivables portfolios would increase - I've seen nothing in their filings to suggest so.

We'll see about ROE, despite a bad performance and little credibility, they committed to +30 pct. ROE. Their overoptimistic ways means we shouldn't take that at face value, but they'd be stupid as hell when they could kitchen sink (but hey, they seem stupid as hell communication wise, so hardly would be surprising).

Anyway, I'd say a decline in ROE is pretty much baked in. So I think we'd be good at these levels. So do they have a viable future - are their services needed?

Ulta Beauty has 33m loyalty members, and their members are much more valuable than non-members (last Ulta investor day has some interesting info), so it does seem like the value they create for their customers is anything but trivial. If it's all just about loose credit and about to unravel, I've somewhat hedged my bet by going long Ulta. :) Perhaps one should go long Lands End as well, since their new agreement should be a meaningful contributor to sales going forward. :)

Let me give you a few less optimistic points to consider - don't believe all of these but I do think a lot are plausible..  in general the thesis can be summed up as don't believe management or at least don't give these guys the benefit of the doubt...

1) held for sale portfolio - why assume they are their worst portfolios? They used to say it was M&A / bankruptcies.. now it's just ppl who weren't focused on card.. maybe it's struggling retailers we signed that we shouldn't have renewed..or had to renew for strategic reasons. Also if they have a shitty portfolio that would be a pain to sell they won't.. they know ppl look at this..  the fact that they are taking writedowns suggests they were way too optimistic in valuing them. Financial companies taking writedowns rarely have one bad mark.. it's usually a series of bad marks. Maybe ONLY these portfolios had bad marks.. maybe more who knows.

2) growth - what's the growth rate on receivables (not active receivables.. just receivables on balance sheet) in the next 3-5 yrs? Is it single digits as the new team said or is it mid teens that the old team said was likely.  What changed to basically halve it.. off a depressed base that has a ton of 'spooling' baked in..

3) why does their ROE have to be 30% vs SYF at 25% - decompose the individual line items and you will see it's all revenue driven.  They actually do worse on credit and Opex efficiency on a fully loaded baisis.. so what gives them the right to earn higher revenue yields.  Is it as the management team claims there is less competition cause they play in small retailers the big boys don't want or is it the other claim of better marketing...  Seems dubious to me.  Why wouldn't the bigger retailers want better marketing if ADS could deliver that? And seeing some of the subscale crap SYF has in the payment solutions and carecrdit them not being interested in small retailers seems like a maybe at best to me.    More likely it's the lower balances on ADS accts which drives yields as the fees (which are typically fixed $) are a bigger part of the yield.  This theory has the nice benefit of also being consistent with their worse credit..  so are 30 percent ROEs guaranteed as loan sizes increase ? I don't know but I question if the bulls are prepared for consistent ROEs below 30%..

4) nearterm guidance is going lower not higher (lower interest rates).  yes yes it's bullshit and we value investors care about intrinsic value.  But stocks go down when guidance is lowered or actual results miss guidance

5) CECL - bears expect either the actual results will be worse than guidance on day 1 or longer term. Lots of reasons for this but two are - their competitors are not stupid and all pointed to much bigger reserve building and some of ADS new clients / categories clearly have longer loan lifes than their old so the portfolio shift will drive day2 reserves higher than ppl are assuming.

6) relatedly they keep saying the new categories should perform the same as their historic in terms of credit but a jewelery or furniture deferred interest loan may not.. especially in a downturn. It's certainly a longer life loan which even they acknowledge.

7) loyaltyone - who is the buyer? Why do they want it.. other than PE that is.. since the cash flow profile is decent..  but PE firms aren't in the business of paying high multiples for a business with limited growth and some regulatory risk from a forced seller.  Their execution on epsilon reduces confidence

8) their non-gaap metrics are crap and on a gaap basis they aren't all that much cheaper than syf.. (well at least they didn't used to be)

9) competition for plcc is increasing - whether it's bnpl, non-plcc rewards or Just better gpcc rewards. The fact is plcc purchase volume as an industry has been anemic for the last two yrs. And the growth in. Non-card related rewards programs reduce the value prop of card programs.  Are Ulta's 33M members going to go get Ulta cards? Will Ulta reward those that dont to a lesser degree - yes but will it matter? .

10) well I don't have one of the top of my head but 10 is a nice number for a list -  so let's just go with cyclicall business with low quality management whose biggest customer is struggling so y would own late in the credit cycle. Can just buy cheaper if credit event occurs or if they work through issues.. will have lots of time to buy don't need to bottom tick. Sell now buy once fixed or credit overhang goes.


Who knows though.  Maybe they did kitchen sink with new managemebt coming in and things will get better from here. Don't really feel strongly one way or another. But think dismissing the bears who have been very very right for the last few quarters - on both trajectory of business and stock price - is a mistake.

KCLarkin

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Re: ADS - Alliance Data Systems
« Reply #473 on: November 09, 2019, 10:04:19 AM »
3) why does their ROE have to be 30% vs SYF at 25% - decompose the individual line items and you will see it's all revenue driven.  They actually do worse on credit and Opex efficiency on a fully loaded baisis.. so what gives them the right to earn higher revenue yields.  Is it as the management team claims there is less competition cause they play in small retailers the big boys don't want or is it the other claim of better marketing...  Seems dubious to me.  Why wouldn't the bigger retailers want better marketing if ADS could deliver that?

Maybe product mix? I haven't looked at SYF but my impression is that they have more co-brand cards which are less lucrative than private label.

frank87

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Re: ADS - Alliance Data Systems
« Reply #474 on: November 09, 2019, 12:48:38 PM »
3) why does their ROE have to be 30% vs SYF at 25% - decompose the individual line items and you will see it's all revenue driven.  They actually do worse on credit and Opex efficiency on a fully loaded baisis.. so what gives them the right to earn higher revenue yields.  Is it as the management team claims there is less competition cause they play in small retailers the big boys don't want or is it the other claim of better marketing...  Seems dubious to me.  Why wouldn't the bigger retailers want better marketing if ADS could deliver that?

Maybe product mix? I haven't looked at SYF but my impression is that they have more co-brand cards which are less lucrative than private label.

SYF has way lower yields...again it's mostly about the RSAs. And the retailer sharing agreements tend to be higher for the larger retailers since they have the scale and resources to do the data, marketing and loyalty in house - relegating SYF to a more balance sheet role. I think it's quite simple why SYF earns lower ROEs.

Ten7suited

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Re: ADS - Alliance Data Systems
« Reply #475 on: November 11, 2019, 07:50:54 AM »
Iirc not all receivables are secured by ABS trusts. They also have equity, Corp debt and most importantly deposits financing a load of receivables.

The NCO difference is as you point out - diff NCO rates in the trust portfolio and remaining.  Yes diff portfolios perform very differently. Look at SYF - Walmart was a 9-10% loss rate portfolio while overall syf is a 6% loss rate portfolio.

Thanks for the response.  Understood that they finance the receivables in other ways too, but we are still missing details on $5bn that is financed through the securitization trusts that I would expect should be out there in some filing.  From the most recent 10-Q: "As of September 30, 2019, the WFN Trusts and the WFC Trust had approximately $12.5 billion of securitized credit card receivables."

The search continues...

kab60

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Re: ADS - Alliance Data Systems
« Reply #476 on: November 14, 2019, 11:24:06 AM »
As for the current valuation I have no clue... On the one hand it looks cheap, but at the same time there is a myriad of reasons why the current price could be the right one (e.g. more reserves to come for old portfolios, lower IRRs for new ones, already high niche real penetration/ market share, further deterioration of retail customers, etc).
I'm still trying to flesh out the bear case. On the last call an analyst triangulated that they took at 60m hit to their portfolios held for sale (2b). I'd assume they're getting rid of their worst clients/portfolios, but even if one assumed all their receivables were impaired, that would be a 600m hit. Hardly threatening. I'd also expect their costs to fund their receivables portfolios would increase - I've seen nothing in their filings to suggest so.

We'll see about ROE, despite a bad performance and little credibility, they committed to +30 pct. ROE. Their overoptimistic ways means we shouldn't take that at face value, but they'd be stupid as hell when they could kitchen sink (but hey, they seem stupid as hell communication wise, so hardly would be surprising).

Anyway, I'd say a decline in ROE is pretty much baked in. So I think we'd be good at these levels. So do they have a viable future - are their services needed?

Ulta Beauty has 33m loyalty members, and their members are much more valuable than non-members (last Ulta investor day has some interesting info), so it does seem like the value they create for their customers is anything but trivial. If it's all just about loose credit and about to unravel, I've somewhat hedged my bet by going long Ulta. :) Perhaps one should go long Lands End as well, since their new agreement should be a meaningful contributor to sales going forward. :)

Let me give you a few less optimistic points to consider - don't believe all of these but I do think a lot are plausible..  in general the thesis can be summed up as don't believe management or at least don't give these guys the benefit of the doubt...

1) held for sale portfolio - why assume they are their worst portfolios? They used to say it was M&A / bankruptcies.. now it's just ppl who weren't focused on card.. maybe it's struggling retailers we signed that we shouldn't have renewed..or had to renew for strategic reasons. Also if they have a shitty portfolio that would be a pain to sell they won't.. they know ppl look at this..  the fact that they are taking writedowns suggests they were way too optimistic in valuing them. Financial companies taking writedowns rarely have one bad mark.. it's usually a series of bad marks. Maybe ONLY these portfolios had bad marks.. maybe more who knows.

2) growth - what's the growth rate on receivables (not active receivables.. just receivables on balance sheet) in the next 3-5 yrs? Is it single digits as the new team said or is it mid teens that the old team said was likely.  What changed to basically halve it.. off a depressed base that has a ton of 'spooling' baked in..

3) why does their ROE have to be 30% vs SYF at 25% - decompose the individual line items and you will see it's all revenue driven.  They actually do worse on credit and Opex efficiency on a fully loaded baisis.. so what gives them the right to earn higher revenue yields.  Is it as the management team claims there is less competition cause they play in small retailers the big boys don't want or is it the other claim of better marketing...  Seems dubious to me.  Why wouldn't the bigger retailers want better marketing if ADS could deliver that? And seeing some of the subscale crap SYF has in the payment solutions and carecrdit them not being interested in small retailers seems like a maybe at best to me.    More likely it's the lower balances on ADS accts which drives yields as the fees (which are typically fixed $) are a bigger part of the yield.  This theory has the nice benefit of also being consistent with their worse credit..  so are 30 percent ROEs guaranteed as loan sizes increase ? I don't know but I question if the bulls are prepared for consistent ROEs below 30%..

4) nearterm guidance is going lower not higher (lower interest rates).  yes yes it's bullshit and we value investors care about intrinsic value.  But stocks go down when guidance is lowered or actual results miss guidance

5) CECL - bears expect either the actual results will be worse than guidance on day 1 or longer term. Lots of reasons for this but two are - their competitors are not stupid and all pointed to much bigger reserve building and some of ADS new clients / categories clearly have longer loan lifes than their old so the portfolio shift will drive day2 reserves higher than ppl are assuming.

6) relatedly they keep saying the new categories should perform the same as their historic in terms of credit but a jewelery or furniture deferred interest loan may not.. especially in a downturn. It's certainly a longer life loan which even they acknowledge.

7) loyaltyone - who is the buyer? Why do they want it.. other than PE that is.. since the cash flow profile is decent..  but PE firms aren't in the business of paying high multiples for a business with limited growth and some regulatory risk from a forced seller.  Their execution on epsilon reduces confidence

8) their non-gaap metrics are crap and on a gaap basis they aren't all that much cheaper than syf.. (well at least they didn't used to be)

9) competition for plcc is increasing - whether it's bnpl, non-plcc rewards or Just better gpcc rewards. The fact is plcc purchase volume as an industry has been anemic for the last two yrs. And the growth in. Non-card related rewards programs reduce the value prop of card programs.  Are Ulta's 33M members going to go get Ulta cards? Will Ulta reward those that dont to a lesser degree - yes but will it matter? .

10) well I don't have one of the top of my head but 10 is a nice number for a list -  so let's just go with cyclicall business with low quality management whose biggest customer is struggling so y would own late in the credit cycle. Can just buy cheaper if credit event occurs or if they work through issues.. will have lots of time to buy don't need to bottom tick. Sell now buy once fixed or credit overhang goes.


Who knows though.  Maybe they did kitchen sink with new managemebt coming in and things will get better from here. Don't really feel strongly one way or another. But think dismissing the bears who have been very very right for the last few quarters - on both trajectory of business and stock price - is a mistake.
Thanks for the pushback, it's highly appreciated. Just noticed they changed the wording in the most recent 10-Q regarding allowance for loan losses. Doesn't square with how they've downplayed things on the conference calls. Will probably take a big hit to equity (as the bears have said all along). These guys suck. :)

"While the Company is currently unable to reasonably estimate the impact of the new adoption, the Company expects the adoption of the standard on to significantly increase its consolidated financial statements allowance for loan loss. Any adjustments to the change in the allowance for loan loss at adoption would be recorded through a cumulative-effect adjustment to retained earnings."

undervalued

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Re: ADS - Alliance Data Systems
« Reply #477 on: November 14, 2019, 12:19:59 PM »
Memcham reduced his position in his latest filing.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

decko

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Re: ADS - Alliance Data Systems
« Reply #478 on: November 14, 2019, 12:30:19 PM »
True..  However, He raised his stake 25% from march to june, which could have been as low as 137 mid june.    He could have sold out this last quarter in july at 157$.   who knows.   But, Im wondering if he has recently acquired more when its $100 - $110 this quarter..  Sometimes when you make a mistake you have to trade your a$% out of the mistake.

roark33

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Re: ADS - Alliance Data Systems
« Reply #479 on: November 14, 2019, 02:26:19 PM »
Every time someone mentions X investor and their position, you should increase your spidey-sense by A LOT.  Do your own work.  It's this sort of outsourced thinking that gets you into bad positions and contorts your thinking.