ADS - Alliance Data Systems

[LC]

I have it in the back of my mind because of Andretta but personally I sold out for a quick 10% a while back. I'm not huge on the cards biz at this point of the cycle. Like I said earlier in this thread I think he's a capable CEO but it seems we are pretty late in the consumer credit cycle. These are still my personal thoughts:

 

Structurally the company has challenges of course, but I always found him capable and therefore anything under his control I would be confident he can manage effectively.

The big thing outside of his control is consumer credit tolerance.

[abitofvalue]

Anyone know which contract this one is?  " the contract for one of our 10 largest clients, representing approximately 3% of our consolidated revenue for the year ended December 31, 2019, is effective through September 2020 and is not expected to renew."

 

Assume its already in their held-for-sale..

[decko]

So, thoughts on minus -7%  to $79?      3.6 billion mkt cap.  900$ million plus in net income expected in 2020.  How devastating is the effect to ADS if a recession hits, which if it does the technical description of a recession varies greatly, or if it does not.  ?  I guess, opinions in general. 

[kab60]

It held up nicely doing the GFC because balances are smaller than general purpose credit cards and rates are higher, so people tend to pay them off first. But boy has it been a painful hold. My takeaway from the last CC was that they need to re-invest/bolt-on some tech to stay competitive, so it's not just that some of their clients struggle. They also need to improve their capabilities. Either way, it seems like disaster is very much priced in while some of the numbers are trending in the right direction. Steven 'insider trader' Cohen bought a large chunk recently, so I suppose he has a form of black edge... :) I sold 1/3 of my position in ADS (think I sold around 105) and took a large bet on Ulta Beauty in the fall, which was the first time I did anything right with ADS. Haven't bought more during the recent selloff, but it is intriguing. Allen Mecham also bought more in Q4, and he usually looks for business with cockroach-like abilities (like they're hard to kill), but this has mostly been a history of a business swarmed with cockroaches...

[kab60]

Added 1/3 to my position, it's getting slaughtered like you'd think it was an Airline... Epsilon sale wasn't too bad, if the world is coronavirused to death, cause they got a much better debt profile now (and it trade at like 3,5x fwd earnings...).

 

Didn't care much for Airmiles or Brandloyalty, that's suddenly a large relative store of value... There were a couple of interesting bits from a KBW fintech conference yesterday:

 

Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - Managing Director [61]

 

Got it. I'm going to shift gears and ask a question about some fun topics around capital and after that, we'll come to the audience for questions. So please, audience prepare some questions. Obviously, CET1 at the bank, really, really strong. When you pull up and you look at the holding company not as strong, how do you guys manage capital at the company? Because I think when you look -- when you think about some of the investor concerns, it's around capital at the holding company level, but that might not necessarily be warranted. So maybe you could just talk about it.

 

Timothy P. King, Alliance Data Systems Corporation - Executive VP & CFO [62]

 

I think about it as a buy no meal kind of a bifurcated model. When I look at the banks, first and foremost, for a variety of reasons, has to be well capitalized, has to have passive safety and soundness with the FDIC. So very comfortable there. But then you move up to the corporate level, and you can't use a financial services model at a corporate level because we have nonfinancial services assets. Then I just look at it, where do I feel comfortable about, when that debt is coming due, do we have enough cash flow to support it short term, do I feel like that debt is not going to be put us in a spot where it doesn't let me sleep at night. For instance, redoing the whole balance sheet the last 6 months with moving all that debt out into 3 and 5 years makes me feel much more comfortable, and then look at how much cash flow we have spinning off. Collectively, call it, $600 million of free cash flow coming from the entity. And I look at the amount of debt we have at $2.8 billion at the parent, you start feeling very comfortable with that. But having said that, I know -- I've heard from a lot of folks today, that's causing consternation because that's you have this $2.8 billion, and then you look at your tangible book equity and the fact that you have negative equity at the parent company makes them feel a little uncomfortable. So obviously, Ralph, myself and the Board will be very clear about what we think we're going to do and make sure that we decide how or if we're going to pay down the debt or how we're going to do that, so we're clear with that.

 

Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - Managing Director [63]

 

So when we think about sort of your regulators, they are myopically looking at the bank. They're not really focused at the holding company level at all.

 

Timothy P. King, Alliance Data Systems Corporation - Executive VP & CFO [64]

 

They do have -- they do look to the bank parent as a source of strength. And I think it's actually a fairly strong indication, they look at the bank parent, I think there is a positive, not a negative from the bank parent. For instance, there's a $750 million line of credit we have at the parent that if ever need be, we could obviously have that available for the banks to make sure the banks have, if they hit an economic downturn, we had to infuse capital down there, is that ability to do that. The regulators are very comfortable from what we've heard. They obviously don't object, and that's how you feel okay. And looking at the bank parent, they're obviously going to watch that. They feel we're in a good spot there.

 

Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - Managing Director [65]

 

Is there any itch to buy back stock given the stock's valuation here? Or not really because you want to shore up capital?

 

Timothy P. King, Alliance Data Systems Corporation - Executive VP & CFO [66]

 

The itch got a whole lot large in the last week.

 

Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - Managing Director [67]

 

Absolutely.

 

Timothy P. King, Alliance Data Systems Corporation - Executive VP & CFO [68]

 

The big drop. Look, it's a conversation we got to have with a more large group. The -- there's a number of investors who said to us, and this is -- look, we run this company for the investors. A number of investors have come and said, we are concerned about your capital structure. The prior questions you had and the amount of debt you have there and the double leverage. But I don't know if we have to address one versus the other. When you start spending $600 million off, you could potentially do some type of share repurchase and some type of debt repayment. I just think we need to be very clear and make that decision and then articulate it to The Street, and that's obviously a work in progress.

[chompsterama]

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.   

[vinod1]

Step 1. Management: Says something optimistic.

 

Step 2. Shareholders: Let me buy, this is not priced in.

 

Step 3: Market: Send stock price down 20%

 

Step 4: Shareholders: Management is stupid, incompetent fools. We can never trust these guys.

 

Step 5: Management: Says something optimistic about something else.

 

Step 6: Shareholders: Yeah! Let me buy more, stock is down and managemnet is optimistic.

 

And so the cycle goes on.

 

[stahleyp]

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. 

 

Do you have a position?

[kab60]

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.

[NotSoWise]

Bad or mediocre managers play delaying game - every day longer they keep a job is a win for them. The longer the better, since they know they may not find another fool to hire them afterwards. Mike Fries from LBTYK is a good example - every day he keeps his job is a win win for him.

 

My experience is to avoid shi..t managers, because if top is shi..t the bottom for sure is not better. Bad guys are not hiring good guys (less competition + good guys dont want to work for fools). I paid for this insight handsomely.

[Peregrine]

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!!

 

 

 

[Peregrine]

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.

[chompsterama]

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. 

 

Do you have a position?

Had.

[bizaro86]

Collecting air miles is just one of those things that Canadians do.

 

This is what I like about the business.

[widenthemoat]

Question for the board -  given they have excess capital at the bank levels, could they dividend out some cash and use this to pay down a portion of their  current debt?

 

Thanks in advance.

[kab60]

Not sure how much they can dividend out, as you say, the banks are well capitalized. Either way, why would they? The risk is in the credit card business. They recently said how they could draw their revolver and pump liquidity into the banks if shit hits the fan.

[widenthemoat]

Fair point. I guess my concern was the banks get hit with charge offs that wipe out profits for the next two years (extreme scenario in my view but certainly possible). In that situation banks would be fine from a capital standpoint but we would have a $2.0 billion debt payment due end of 2022 right? Been lurking on the boards for years and the discussions are fantastic btw so thanks everyone.