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.

[Peregrine]

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.

[Peregrine]

The rate that BNPL has been growing at has been alarming...young people seem to love the idea of splitting up a $100 purchase into 4 $25 biweekly installments. Already a lot of evidence that BNPL drives much higher sales. Still, the yields on these products are insane...I think Afterpay does nearly 50%. This is largely due to the quick turnover and high merchant fee but remains to be seen whether they can hold.

 

Nonetheless, ADS thinks Bread's revenues can at least double in the coming year. The company produced ~$9 in EPS last year following a huge amount of restructuring costs. Stock still looks fairly cheap.

[mwtorock]

Paypal buy now pay later seems to be cheaper in terms of fees charged to merchants, but it does not seem to be available to smaller merchants at the moment. Paypal management said they don't charge additional fees to merchants for BNPL (only the payment process fees), but I have not cross checked that yet.

[kab60]

I agree it looks cheap, but I am completely out now. Bought from 210 and down to 28. My biggest loser, but the return since March made up for some of it. I still think it has quiet a bit of room to run, but I like other risk/rewards better in this environment. Happy with the back and forth in March, made it easier to double up near the bottom.

[Longnose]

I looked at ADS about 2 years back from one of Allan Meacham's 13f's. Ultimately, i decided that it was too complex for me and sat it out. I am glad I did.

 

I am quite curious about the BNPL stuff that is growing like crazy. I ran into the company Sezzle (SZL) a while back and started digging into them. They are listed on the ASX. Anybody looked deeper into any of the other BNPL exclusive companies? most are wrapped up in other payment providers like Paypal or Klarna.

 

I keep looking at Sezzle and thinking about dipping my toes in.

 

 

[Peregrine]

I looked at ADS about 2 years back from one of Allan Meacham's 13f's. Ultimately, i decided that it was too complex for me and sat it out. I am glad I did.

 

I am quite curious about the BNPL stuff that is growing like crazy. I ran into the company Sezzle (SZL) a while back and started digging into them. They are listed on the ASX. Anybody looked deeper into any of the other BNPL exclusive companies? most are wrapped up in other payment providers like Paypal or Klarna.

 

I keep looking at Sezzle and thinking about dipping my toes in.

 

There's a lot of them and they all have different monetization methods. The most popular ones right now charge no interest to the loan holder but charge the merchant hefty discount rates instead. This has driven incremental sales that the merchant may not have seen and surprisingly good loss experience. The big question, IMO, is the discount rate...I can see that getting bid down pretty fast.

[adhital]

Revisiting the valuation for ADS:

Loan loss is improving. Based on the latest Net charge-offs data , I think they've over $1.0 Billion of excess allowance for loan loss in the Balance sheet. They've now started releasing it to the income statement. 

They're separating the LoyaltyOne business. 2021 Private market value should be anywhere between $1.0 to 2.0 Billion or more depending on post-pandemic recovery. I'll give $1.5 Billion 

Giving 13 multiple to 2021 card services core earning after-tax (~$400 million or $8/share) is close to $5 Billion card-service valuation. I think $400 million earning for FY 2021 is conservative (ex- $1.2B allowance for loan loss). 

Overall this should be worth at least $7 to $8 Billion or anywhere between 15% to 25% discount to the current market value.  

Changes post new CEO-

BNPY Bread is now integrated with Fiserv Merchant Clients and RBC's payment solutions. If I compare Bread with other pure BNPY players ( AfterPay 19B , Affirm 13B) , Bread itself can be a multi billion dollar standalone company in the next 5 years. 

New board members, includes Citigroups's ex-CFO John C. Gerspach who recently purchased ADS's stock on the open market

Notable new hirings, Val Greer as Chief commercial Officer and Perry Beberman as new CFO who comes from Bank of America

Exciting Digital offerings and sticky business. I was in this one from $150 and doubled down when it went below $30. Slowly trimming my position not to let it go over 7% overall but I think this can be 2-3x potential in next 5 years given how this new management is executing the business. 

Any thoughts? 

Edited May 15, 2021 by adhital

[adhital]

On 5/15/2021 at 3:16 PM, adhital said:

Revisiting the valuation for ADS:

Loan loss is improving. Based on the latest Net charge-offs data , I think they've over $1.0 Billion of excess allowance for loan loss in the Balance sheet. They've now started releasing it to the income statement. 

They're separating the LoyaltyOne business. 2021 Private market value should be anywhere between $1.0 to 2.0 Billion or more depending on post-pandemic recovery. I'll give $1.5 Billion 

Giving 13 multiple to 2021 card services core earning after-tax (~$400 million or $8/share) is close to $5 Billion card-service valuation. I think $400 million earning for FY 2021 is conservative (ex- $1.2B allowance for loan loss). 

Overall this should be worth at least $7 to $8 Billion or anywhere between 15% to 25% discount to the current market value.  

Changes post new CEO-

BNPY Bread is now integrated with Fiserv Merchant Clients and RBC's payment solutions. If I compare Bread with other pure BNPY players ( AfterPay 19B , Affirm 13B) , Bread itself can be a multi billion dollar standalone company in the next 5 years. 

New board members, includes Citigroups's ex-CFO John C. Gerspach who recently purchased ADS's stock on the open market

Notable new hirings, Val Greer as Chief commercial Officer and Perry Beberman as new CFO who comes from Bank of America

Exciting Digital offerings and sticky business. I was in this one from $150 and doubled down when it went below $30. Slowly trimming my position not to let it go over 7% overall but I think this can be 2-3x potential in next 5 years given how this new management is executing the business. 

Any thoughts? 

Alliance Data Investor event presentation 5/18/2021

https://s23.q4cdn.com/525801907/files/doc_presentations/2021/05/ADS_MainPPT_Deck_SK_v18_With_Footer_final.pdf

 

[Peregrine]

On 5/15/2021 at 6:16 PM, adhital said:

Revisiting the valuation for ADS:

Loan loss is improving. Based on the latest Net charge-offs data , I think they've over $1.0 Billion of excess allowance for loan loss in the Balance sheet. They've now started releasing it to the income statement. 

They're separating the LoyaltyOne business. 2021 Private market value should be anywhere between $1.0 to 2.0 Billion or more depending on post-pandemic recovery. I'll give $1.5 Billion 

Giving 13 multiple to 2021 card services core earning after-tax (~$400 million or $8/share) is close to $5 Billion card-service valuation. I think $400 million earning for FY 2021 is conservative (ex- $1.2B allowance for loan loss). 

Overall this should be worth at least $7 to $8 Billion or anywhere between 15% to 25% discount to the current market value.  

Changes post new CEO-

BNPY Bread is now integrated with Fiserv Merchant Clients and RBC's payment solutions. If I compare Bread with other pure BNPY players ( AfterPay 19B , Affirm 13B) , Bread itself can be a multi billion dollar standalone company in the next 5 years. 

New board members, includes Citigroups's ex-CFO John C. Gerspach who recently purchased ADS's stock on the open market

Notable new hirings, Val Greer as Chief commercial Officer and Perry Beberman as new CFO who comes from Bank of America

Exciting Digital offerings and sticky business. I was in this one from $150 and doubled down when it went below $30. Slowly trimming my position not to let it go over 7% overall but I think this can be 2-3x potential in next 5 years given how this new management is executing the business. 

Any thoughts? 

 

Seems clear that the key question about this company is whether they can grow receivables. The way the market is pricing the stock (~7x 2021E EPS) currently suggests no.

 

I think that they can. Credit sales are now probably above pre-pandemic levels, they have strong positions in secular growing verticals and have moved meaningfully away from struggling retailers over the past 5 years. Moreover, they have Bread - which is the only white label BNPL player currently. I think they resume growth in receivables starting in H2 and start seeing revenues inflect upward next year.