Yes, I think that math is directionally correct. There's a rate drop to take into account which should compress NIM in the short term. But like lower gas prices that should be a plus for consumers, lower rates probably means people refi like crazy and get more disposable income all else equal. On the other hand, increased medical costs due to coronavirus will probably be a hit.
I think the consumer not shopping at those dinky retailer ADS serves is a bigger problem than medical costs.
Spekulatius - let’s say you’re right, that people stop shopping at these retailers over the next two months. And I mean really stop shopping, let’s assume that they do zero credit card sales, online and offline, over the next two months starting today.
Well in that scenario, ADS’ current ~$18.0 billion book of receivables, which have principal collections of ~12.5% per month (per their most recent trust data), would be a book of ~$13.0 billion of receivables. Now let’s also assume we enter a recession and charge-offs hit ~9.0% (roughly consistent with 2009.) At this point, we are basically breakeven for the banks, and that is assuming zero operational cost cutting from 2019 levels.
After that, things start to normalize and we get back to 7.0% charge-offs (still historically high), and we cut some costs from operation to get back to a level that makes some sense (let’s say $1.5 billion of operating expenses, which is 20% higher than ADS’ operating costs with a book of ~$14.0 billion of receivables.)
Based on my numbers, that business has about $4.50 of owner’s earnings per share and a substantial amount of cash on the balance sheet. I would venture to say that their book of receivables would grow going forward, but let’s assume for stress testing’s sake that it doesn’t. Well, I would be willing to pay about $45.00 per share to get a 10.0% return on those owner’s earnings into perpetuity, without taking into consideration any return of capital we could potentially receive from the principal collections not being reinvested.
I’m not saying there is no risk - of course there is. It just seems reasonable, and rational, to like the risk vs. reward setup here. My question to the board is this: would the inability to fund new receivables cause the trust to enter early amortization? I’ve been reading through the documents and have not been able to come to a firm conclusion on this yet, any insights would be greatly appreciated.
Thanks,
Dan
