ADS - Alliance Data Systems

[chompsterama]

Did I hear on the call that with a 25% decrease in sales for a full year plus 10% charge off rate for a full year they are cash flow positive?

9% was the charge off rate in the great recession as well and only that high for 2 months?

You believe their guidance? 

[kab60]

Did I hear on the call that with a 25% decrease in sales for a full year plus 10% charge off rate for a full year they are cash flow positive?

9% was the charge off rate in the great recession as well and only that high for 2 months?

You believe their guidance?

Yep, that's what they said.

As for believing their guidance - it seems to square pretty well with the numbers.

CEO is 45 days into the job, there's no need for him to put unneccessary pressure on himself and he had every incentive to kitchen sink. He basically said they're in a better situation than during the GFC - he'd look pretty moronic if they go belly up in a short time.

Also an interesting point on how Air Miles is very cash generative in the current environment, since nobody redeems points for flights but still collect them. Clearly makes sense.

[dbuch]

ADS spend $450mm including $100mm in stock to buy digital payments firm BREAD. Not sure how this is more "accretive" than buying back shares at a mid single digit multiple. They could have taken out 7 to 9mm shares or 14-19% of the outstanding. If they have the liquidity for M&A why not buy shares at the decade low? Either they are ignorant about capital allocation or this thing is wildly accretive. Seems the former to me.

[widenthemoat]

Agreed - issuing shares as part of the transaction makes it even more frustrating. With that said, it’s still wildly cheap and one should still do well at these prices over the long haul.

[frank87]

I think management sees the traction "buy now, pay later" is getting and decided that they needed this capability immediately. Clear that current management is taking a different tact whereas previous management was all about buying back stock and not reinvesting to ensure that the company's relevance doesn't inexorably decline.

Can understand what management is doing here...just question the timing with the current stock price. That said, dilution is about 2 mm shares, so not huge.

[kab60]

I think management sees the traction "buy now, pay later" is getting and decided that they needed this capability immediately. Clear that current management is taking a different tact whereas previous management was all about buying back stock and not reinvesting to ensure that the company's relevance doesn't inexorably decline.

Can understand what management is doing here...just question the timing with the current stock price. That said, dilution is about 2 mm shares, so not huge.

I agree with this take. It is also hardly a surprise given they telegraphed it somewhat earlier this year. I like how they get leaner and invest in the biz, and the dilution is insignificant. It might also have been necessary to get the deal done or/and to keep key people at Breath onboard and incentivized.

[dbuch]

I agree the dilution is not huge but the acquisition either means

A) they need this to remain competitive in which case maybe their competitive advantage has eroded over the last several years or
B) Bread is wildly accretive or
C) They suck at capital allocation

Probably a combination of A and C which is concerning.

That being said, they still appear very cheap at the current price which provides some margin of safety against the above.
 

[dbuch]

IR isn't responding to my questions on asset allocation. This may be cheap but i'm really questioning their leadership at this point. If this got back to $20 eps on 47mm shares that would have been $23.50 eps on 40mm shares assuming they used the $350mm to buy back stock at $50. Instead they are issuing equity at a 2.5x normalized P/E to acquire a business in which they haven't given any revenue or EBITDA guidance on (probably not much there). Either they really need this business to remain competitive, which should be a negative read through, or they are absolute idiots about capital allocation. I know most management teams are very focused on the business and capital allocation is an afterthought but to me this just seems incompetent.

If ADS really does need to continue to invest in fintech to remain competitive and this was a sort of catch up from under investing then true economic cash flows need to be reduced for that ongoing maintenance capex/M&A. Maybe $100-$200mm a year needs to be used to acquire/build new technology to remain relevant in which case they were over-earning pre Covid and true earnings power needs to be reduced to say $16 eps at 2019 levels. I don't really think this is the case as the "pay as you go" might be a growth driver but not a must have to remain relevant. I think this was just a misuse of capital.

Best question on the call and Ralph just glossed right the f**k over it

Q - Ryan Nash
maybe just talk about how you think about the strategic benefits of this versus other uses of capital? And I guess just given where the stock is trading today, it seems that you simply you could have reduced shares by a material amount. So I'm curious just how do you weigh the long-term strategic benefits versus the near-term financial implications?

A - Ralph Andretta
Yeah, Ryan. So I'll start then I'll ask Tim to chime in. This is Ralph. So I think there are a couple of things. I think if COVID-19 has taught us anything, it has taught us the value of ecommerce.
And you've seen that in the first and second quarter and we'll continue to see e-commerce pretty much explode. So for us, this investment was power markets. The technology that Bread brings to the table and the talent they bring to the table is very much in our strategic plans as we move forward. So I think long term this is the right decision for us.

A - Tim King
We feel it's very, very important strategically, while of course maintaining the balance of flexibility we have at the parent level. Our capital allocation strategy remains, if we're finding things that we find are this important to our business, of course we're going to invest in them, but from there of course maintaining our dividend and not doing any share repurchases.

[widenthemoat]

Yeah those answers kind of baffled me as well. If they are going to maintain the dividend and not do share repurchases what are they going to do with all of the cash that piles up? They have historically needed very little capital to grow this business, almost all of their profits went to share repurchases and dividends. Maybe they did underinvest in the business, but there really is little in the way of tangible assets here so I don't think the amount of investment required to beef up their technology will be large in comparison to their annual cash flow. I think they will eventually either raise the dividend or start doing share repurchases again. I hope so at least, otherwise they are going to be acquiring everything in sight or cash will just pile up on the balance sheet, neither of which I am a large fan of.

Worth noting, I know that Tim King is a proponent of share repurchases. He's mentioned them on calls before and understands capital allocation in that sense. This is almost certainly Ralph looking to right-size the ship, and hopefully once he is comfortable they have done so, they will resume repurchasing.

[kab60]

IR isn't responding to my questions on asset allocation. This may be cheap but i'm really questioning their leadership at this point. If this got back to $20 eps on 47mm shares that would have been $23.50 eps on 40mm shares assuming they used the $350mm to buy back stock at $50. Instead they are issuing equity at a 2.5x normalized P/E to acquire a business in which they haven't given any revenue or EBITDA guidance on (probably not much there). Either they really need this business to remain competitive, which should be a negative read through, or they are absolute idiots about capital allocation. I know most management teams are very focused on the business and capital allocation is an afterthought but to me this just seems incompetent.

If ADS really does need to continue to invest in fintech to remain competitive and this was a sort of catch up from under investing then true economic cash flows need to be reduced for that ongoing maintenance capex/M&A. Maybe $100-$200mm a year needs to be used to acquire/build new technology to remain relevant in which case they were over-earning pre Covid and true earnings power needs to be reduced to say $16 eps at 2019 levels. I don't really think this is the case as the "pay as you go" might be a growth driver but not a must have to remain relevant. I think this was just a misuse of capital.

Best question on the call and Ralph just glossed right the f**k over it

Q - Ryan Nash
maybe just talk about how you think about the strategic benefits of this versus other uses of capital? And I guess just given where the stock is trading today, it seems that you simply you could have reduced shares by a material amount. So I'm curious just how do you weigh the long-term strategic benefits versus the near-term financial implications?

A - Ralph Andretta
Yeah, Ryan. So I'll start then I'll ask Tim to chime in. This is Ralph. So I think there are a couple of things. I think if COVID-19 has taught us anything, it has taught us the value of ecommerce.
And you've seen that in the first and second quarter and we'll continue to see e-commerce pretty much explode. So for us, this investment was power markets. The technology that Bread brings to the table and the talent they bring to the table is very much in our strategic plans as we move forward. So I think long term this is the right decision for us.

A - Tim King
We feel it's very, very important strategically, while of course maintaining the balance of flexibility we have at the parent level. Our capital allocation strategy remains, if we're finding things that we find are this important to our business, of course we're going to invest in them, but from there of course maintaining our dividend and not doing any share repurchases.

They're going through what is actually unprecedented for a change. CEO telegraphed very clearly that they need to invest more in digital to remain relevant. Not even Autozone kept their buyback up this time around, you can hardly blame a new CEO in s credit card Company for not buying back shares atm. These guys just need to not go under and equity should rerate. That said, Tim does sound like an idiot, and I defintately wouldn't expect any Outsider-type moves even when the worst has blown over. As for cash piling up, they just raised some not very cheap debt, so it would probably make sense to get leverage down. I agree an agressive approach here might be tempting if one considers shareholders as the only stakeholders, but I don't think you can expect that from a hired CEO considering the backdrop. Them investing in digital is a pretty good signal that they need to bolster capabilities, but also that credit quality is holding up nicely.