If this thing survives, we'll have a multibagger on our hands from these levels. So how do we kill it?
What if their clients go bankrupt - a real possibility given how stores will be closed? In the last few years, these guys tried to improve the optics of the business by pruning clients in distress. But check what the CFO said a couple of weeks ago:
The pruning really consisted of 3 different areas. And when we talk about pruning we talk about selling the portfolios. We had areas that were nonstrategic, profitable businesses that we just decided for a variety of reasons, compliance, and the amount of infrastructure we have to put around supporting that, that we exited.
So strategic reasons. Two, retailers that had some type of financial health issues, a Bon-Ton would be an example there. And the last is, if we were -- we did not get a renewal for a client. The first 2 categories won't be an issue. We've made many strategic decisions past in 2018, 2019. We're able to sell those actually in the fourth quarter of 2019.
Most -- I can't imagine if we have a retailer who's not doing well financially anymore that we would prune that. I think we'll let those just matriculate through our system. They're very, very profitable. You just have to replace those receivables, and prior we chose to sell them. Most likely, we'll keep those. So my only risk, as I look at any type of loss is going to be nonrenewal.
So EVEN if their clients gets distressed, ADS can still make money off of them. (at the same conference the CFO said he was attracted to buybacks - this when shares were at 75 - hardly seemed like he expected the end of the Company).
Then we have a new CEO on board. The old guard lost all credibility, new guy starts with a clean slate. Now he might be dumb as hell, but why'd he say THIS if he expected the Company to enter bankrupcy in a couple of months:
"Alliance Data emerged from 9/11, the financial crisis of 2008 and numerous natural disasters as a stronger, leaner competitor. Our business model is resilient and has weathered considerable pressures.
Our management team is highly experienced, and our portfolio is better positioned today from a risk standpoint than during previous crisis situations. Our operational strength and financial flexibility enable us to support our clients' needs both today and in the future, and we continue to plan on making strategic investments in the business as appropriate," Mr. Andretta concluded.
In other words, they're less exposed to mall apparel as they used to. So some of their clients might muddle forward through ecommence, while others will obviously struggle.
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The CFO also stressed that the guidance was extremely conservative this year. It obviously didn't contemplate coronavirus, large rate cuts and a country partly locked down. But the starting point should be conservative.
So the headwind will be from rate cuts, pressuring NIM due to increased funding costs. And less receivables growth will increase charge-offs. And then the big question is obviously employeement.
On the other hand, lower funding costs is a temporary headwind. And low gas prices, helicoptermoney and an inability to spend money when locked up at home might shore consumers finances a bit.
As for "liquidation" value, there's around 3b equity in the banks I believe off the top of my head.
And LoyaltyOne (BrandLoyalty, Airmiles) which, say it fetched 8 times ebitda in a normal environment, would be worth 2b.
Vs. a marketcap of 1,2b and 2,8b debt at corporate.
I'd really love for someone to try and kill this Company. I just don't see it unless we have something far worse than the GFC on our hands. If not, this thing might be over in 8 weeks when most people have been infected with COVID19 - and who knows how many have died.
Coming out of a crisis with elevated charge-offs, their charge-offs will most likely fall, thus increasing profitability and at least optical "safety" of their clients. If people ever figure they wanna pay 5xtimes earnings it should return 300 pct. 7xtimes earnings should be 500 pct. I know that sounds stupid considering the trajectory, but these guys merely have to make it through to be a multibagger it seems.
Bonds traded at 93,75 cents on the dollar yesterday:
https://markets.businessinsider.com/bond/historical/alliance_data_systems_corpdl-notes_201921-24_regs-bond-2024-usu01797ah90
