ADS - Alliance Data Systems

[frank87]

I think people give way too much credit to management when a business is doing well and assign way too much blame to management when a business isn't doing well. Ultimately, it's the business and its innate strengths and weaknesses that has the largest impact on its fate. Like Buffett once said, "when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

Not saying that Alliance Data has bad economics, quite the contrary in fact, but it can't be denied that they've faced headwinds in their core mall-based retailer partner base in recent times. Management (and investors) had been accustomed to pretty strong and steady growth for more than a decade (where were the criticisms when they were growing rapidly and the stock was at $300?) and suddenly ran smack into mass retail closures and bankruptcies. It's been quite a substantial shift.

[Spekulatius]

Just forget this crap company and buy DFS or SYF if you want get involved in CC companies. Way better management and they both are cheap. Even AXP is reasonably cheap right now.

Why deal with a crap company when well managed companies in the same sector are trading cheap?

[abitofvalue]

You are either really brave or really gullible to believe anything Tim King (or anyone else at ADS) says about the business.  The guy has been so wrong about his business so many times.  He is also the guy that defended and was proud of a giant share repurchase at 100% above today's price.   

Probably a combination. Tim is an idiot, but he should know he'll be gone sooner rather than later if he fumbles one more time. Capital structure looks fine, Air Miles and Brand Loyalty could probably take out almost all corporate debt if they wanted to - or buy back half the Company at these levels.

You think they can get $2.8B for LoyaltyOne? or am i misinterpreting?  They are obviously trying to sell it based on their actions and comments.. but if not successful it seems like a major write-down will be necessary.. (non-cash but further lowering equity).. heck if as i suspect they are going to get a crap valuation for it a writedown will be necessary even if they succeed.

Isnt the fed cut going to make them guidedown?  It did last year and they said they had again NOT contemplated lower rates in guidance.  though they were overly conservative this year.. still as CFO all Tim has done is raise guidance once then buyback shares then guidedown, then issue low 2020 guidance and now he will guidedown again..

Ralph seems legit and the stock is cheap but a 100-day listening tour seems incredibly tone deaf given what is going-on. I suspect he will need to clean house.. he already hinted that he has identified gaps that need to be fixes.  that Horn not Ralph appears to be managing the Loyaltyone process is baffling!!

[frank87]

You are either really brave or really gullible to believe anything Tim King (or anyone else at ADS) says about the business.  The guy has been so wrong about his business so many times.  He is also the guy that defended and was proud of a giant share repurchase at 100% above today's price.   

Probably a combination. Tim is an idiot, but he should know he'll be gone sooner rather than later if he fumbles one more time. Capital structure looks fine, Air Miles and Brand Loyalty could probably take out almost all corporate debt if they wanted to - or buy back half the Company at these levels.

You think they can get $2.8B for LoyaltyOne? or am i misinterpreting?  They are obviously trying to sell it based on their actions and comments.. but if not successful it seems like a major write-down will be necessary.. (non-cash but further lowering equity).. heck if as i suspect they are going to get a crap valuation for it a writedown will be necessary even if they succeed.

Isnt the fed cut going to make them guidedown?  It did last year and they said they had again NOT contemplated lower rates in guidance.  though they were overly conservative this year.. still as CFO all Tim has done is raise guidance once then buyback shares then guidedown, then issue low 2020 guidance and now he will guidedown again..

Ralph seems legit and the stock is cheap but a 100-day listening tour seems incredibly tone deaf given what is going-on. I suspect he will need to clean house.. he already hinted that he has identified gaps that need to be fixes.  that Horn not Ralph appears to be managing the Loyaltyone process is baffling!!

LoyaltyOne has been doing ~$240-260 mm in EBITDA a year so I can definitely see a 10x multiple with all this PE money lying around - plus, it produces float. But the debt really doesn't matter that much at these levels.

[kab60]

Just forget this crap company and buy DFS or SYF if you want get involved in CC companies. Way better management and they both are cheap. Even AXP is reasonably cheap right now.

Why deal with a crap company when well managed companies in the same sector are trading cheap?

It trades at half the multiple of something like DFS, which does seem cheap on its own, and then you have optionality from divestments.

LoyaltyOne does 1b revenue and 250m ebitda, with Air Miles being basically a monopoly, so perhaps they can get some 8xebitda in total for those two. That would buyback half the credit card Company, and if they don't do it themselves, PE shops are flush in cash.

As for leadership, there's new management in town. But as someone else said, I think management are usually given way too credit - both when things are good, and when things are dire. Luck plays a huge role. These Guys had tailwinds, then headwins, and they've been really bad at setting expectations. That's a killer on Wall Street.

They've botched it by being overly optimistic and having a poor handle on how to set expectations, as well as catering to short term demands from shareholders. I suspect ValueAct played a major role in their decision to prune underperforming but profitable customers in an attempt to change the optics (these shenanigans of focusing on "active customres"). I'm happy that Tim The Idiot said that's not gonna happen goin forward.

Anyway, I basically prefer the economics of ADS' model and the focus on smaller clients to the focus of something like SYF combined with extreme pessimism, new management and optionality from Loyalty One.

[Spekulatius]

Just forget this crap company and buy DFS or SYF if you want get involved in CC companies. Way better management and they both are cheap. Even AXP is reasonably cheap right now.

Why deal with a crap company when well managed companies in the same sector are trading cheap?

It trades at half the multiple of something like DFS, which does seem cheap on its own, and then you have optionality from divestments.

LoyaltyOne does 1b revenue and 250m ebitda, with Air Miles being basically a monopoly, so perhaps they can get some 8xebitda in total for those two. That would buyback half the credit card Company, and if they don't do it themselves, PE shops are flush in cash.

As for leadership, there's new management in town. But as someone else said, I think management are usually given way too credit - both when things are good, and when things are dire. Luck plays a huge role. These Guys had tailwinds, then headwins, and they've been really bad at setting expectations. That's a killer on Wall Street.

They've botched it by being overly optimistic and having a poor handle on how to set expectations, as well as catering to short term demands from shareholders. I suspect ValueAct played a major role in their decision to prune underperforming but profitable customers in an attempt to change the optics (these shenanigans of focusing on "active customres"). I'm happy that Tim The Idiot said that's not gonna happen goin forward.

Anyway, I basically prefer the economics of ADS' model and the focus on smaller clients to the focus of something like SYF combined with extreme pessimism, new management and optionality from Loyalty One.

My counterargument is that ADS valuation is only 1/2 of DFS, if you believe the management seems adjusted earnings jumbo jumbo. When you compare GAAP earnings, the difference is much smaller. Given the secular challenges in ADS client base, I believe the difference in valuation is justified. I have learned the hard way that dealing with restricting the assumptions going in tend to be vastly optimistic as fats the outcome is concerned.

We are seeing now a major demand shock from the epidemic, that I think will hit ADS client base very hard (and DFS certainly as well) as well as lower interest rates depressing NIM. A combination of increasing credit losses and lower NIM is not a good combination for any of these companies, but I expect ADS to do far worse than DFS.

Disclosure: I sold my DFS as well a week or so ago, when I cleaned out my portfolio.

[bizaro86]

If it matters - Air Miles just lost a major customer - the drugstore chain Rexall will no longer be giving out Air Miles. My sense would be that they were probably the 5th largest purchaser of Air Miles.

BMO (credit cards) and Amex charge cards are likely the biggest, followed by their grocery partner (Safeway and Sobeys) and then the gas partner (Shell).

[rb]

If it matters - Air Miles just lost a major customer - the drugstore chain Rexall will no longer be giving out Air Miles. My sense would be that they were probably the 5th largest purchaser of Air Miles.

BMO (credit cards) and Amex charge cards are likely the biggest, followed by their grocery partner (Safeway and Sobeys) and then the gas partner (Shell).

Don't forget about LCBO (liquor store). I don't know if it's in top 5 by revenue but it's certainly one of the most important partners. Most ppl I know only have an airmiles account because they give them out at the LCBO.

For our non-canadian members I will say this. Airmiles is not such a great program. I don't think anyone pays 10x EBITDA for that.

[bizaro86]

If it matters - Air Miles just lost a major customer - the drugstore chain Rexall will no longer be giving out Air Miles. My sense would be that they were probably the 5th largest purchaser of Air Miles.

BMO (credit cards) and Amex charge cards are likely the biggest, followed by their grocery partner (Safeway and Sobeys) and then the gas partner (Shell).

Don't forget about LCBO (liquor store). I don't know if it's in top 5 by revenue but it's certainly one of the most important partners. Most ppl I know only have an airmiles account because they give them out at the LCBO.

For our non-canadian members I will say this. Airmiles is not such a great program. I don't think anyone pays 10x EBITDA for that.

Good point. I live in Alberta, where liquor sales are privatized. Interestingly, less and less liquor stores here are offering air miles, which was formerly fairly common. I think it's only the Safeway/Sobeys liquor stores that offer them now.

I think 10x ebitda is probably high, but if it floated publicly much lower than that I'd be an interest buyer of an IPO. I think the inertia alone on the credit card issues miles makes the business valuable. Most people dont switch cards ever.

[rb]

I wouldn't buy them even at IPO. I actually think it's a pretty crappy program.

Years and years ago I actually sold the BMO air miles credit card. Most people don't even know how the program works and how you can use the rewards. Collecting air miles is just one of those things that Canadians do. I've done the air miles thing for years and the most I've gotten out of it were some tickets to the CN Tower. Most people get less. I don't think there's a lot of loyalty towards it.

There's better programs out there for sure. Aeroplan is certainly better for air travel. I think PC has done a fantastic job with their program. Air miles, not so much.

Edit: Until you you mentioned it in your post I didn't even know Sobeys was an AirMiles partner. There's no Sobeys store close to my house buy I regularly shopped at Freshco (which is Sobeys) and I've never seen or heard anything about airmiles. Not very encouraging.