ADS - Alliance Data Systems

[Foreign Tuffett]

Arlington Value sold some of its ADS stake in Q1

 

https://seekingalpha.com/article/4264194-tracking-allan-mechams-arlington-value-capital-portfolio-q1-2019-update

[undervalued]

Glenn Greenberg also sold some of his holdings.

[mwtorock]

Glenn Greenberg also sold some of his holdings.

 

kudos to them if they sold before the deal announcement. that was a disappointment.

[abitofvalue]

 

 

Definitely looking more and more likely that this is the end game.....either way I haven't seen many opportunities (except for extreme market dislocations) to buy rapidly growing businesses with 30% returns on incremental capital selling at this multiple.  By the way does anyone think that there is a company that could more profitably deploy the card business assets within their business model? Is there another company that anyone can think of where synergies are significant and where it makes sense to transfer ownership?  Thx

 

Discover..  couple of yrs back dfs said only way they would get into private label is of they could buy something big.  Dfs partnership with SYF may be an issue . But maybe not.  Guess arguably syf could also buy it and create a Pvt label powerhouse.  Don't see any large being interested or getting approval.. well maybe Citi but unlikely

 

Other option would be a China union pay / Amazon Pay type that wanted to expand acceptance into stores rapidly... But that likely has more issues that I am forgetting as I spitball.

 

Private equity could be an interesting owner though maybe too cyclical. Valuation would need to fall more before they got interested imo. 

 

 

[decko]

How effective or destructive is the secular downturn in physical retail to ADS?  Also, is there a shift away from CC's to digital (paypal, etc)?  Depending upon the answers is ADS a melting ice cube?

[glorysk87]

How effective or destructive is the secular downturn in physical retail to ADS?  Also, is there a shift away from CC's to digital (paypal, etc)?  Depending upon the answers is ADS a melting ice cube?

 

It hurts them, at least in the short-term, evidenced by the amount of receivables they've had to either wind-down or sell off over the past year or two, mainly as a result of outdated retailers going bankrupt (eg. BonTon, Gander Mountain). I don't think this trend is permanent, but more a temporary air pocket. ADS is seeing success signing up new retailers (eg. Carter's) that are more successful, as well as digital players (eg. Houzz, Wayfair). These new portfolios will take time to spin up, but I don't think it's a stretch to see ADS returning to growth. I don't think there is much if any structural change to the business.

[adhital]

New CEO https://www.sbnonline.com/article/alliance-data-kicks-into-high-gear-under-melisa-millers-leadership/?all=1

[KCLarkin]

New CEO sounds promising

[Broeb22]

New CEO https://www.sbnonline.com/article/alliance-data-kicks-into-high-gear-under-melisa-millers-leadership/?all=1

 

“We believe high-growth companies have to double in size every five years, and so our plan always keeps us on that path,” Miller says.

 

When a CEO of a financial company says that, it’s not very encouraging to me.

[Spekulatius]

New CEO https://www.sbnonline.com/article/alliance-data-kicks-into-high-gear-under-melisa-millers-leadership/?all=1

 

“We believe high-growth companies have to double in size every five years, and so our plan always keeps us on that path,” Miller says.

 

When a CEO of a financial company says that, it’s not very encouraging to me.

 

She said the same thing 4 years ago.

https://www.columbusceo.com/content/stories/2015/12/qampa-melisa-miller-of-alliance-data-card-services.html

[adhital]

Is this is a value trap or an opportunity? With ~50% credit sales conversion as receivable and new verticals growing at ~10% yoy, even with $18 true EPS this year (10% drop), this is trading at 13% earning yield. Even a 20% ROE gives 6% EPS growth with just over 30% reinvestment. PE multiple of 12 gives 15% IRR.

Even if the card revenue drops considerable, like (1) sales/receivable drops – reduced carry balance? Smart consumer?  (2) new verticals signing plus sales growth stalls or drops? (3) increased default rate?  However, I’m not certain these are the likely events given the way IKEA, Ulta and new vertical sales are growing, with all a proprietary AI and data mining expertise this company has, this seems to be a safe 10% yield financials even without any growth.

 

[glorysk87]

I own it. At this level it's priced for a recession. By my numbers it's essentially pricing in >7.5% NCO's and a >10% decline in receivables the next two years. Downside/upside appears favorable to me. Definitely a bit of a dumpster fire name though.

[ander]

I'm scratching my head though as in I get the reason (i.e., they're likely going to sell loyalty division and you're going to be left with the card business), but doesn't this just seem crazy abrupt - unless if I'm missing something. I known Horn (the CFO) had announced he was leaving and was hanging out until transition, but Heffernan (the CEO) was working on this transition and seems like the board gave him the boot abruptly. Granted they had been missing targets for past couple of years or so. So was the timing of this because there's another shoe to drop, is it because the loyalty division sale is moving along, or something else.

[glorysk87]

I'm scratching my head though as in I get the reason (i.e., they're likely going to sell loyalty division and you're going to be left with the card business), but doesn't this just seem crazy abrupt - unless if I'm missing something. I known Horn (the CFO) had announced he was leaving and was hanging out until transition, but Heffernan (the CEO) was working on this transition and seems like the board gave him the boot abruptly. Granted they had been missing targets for past couple of years or so. So was the timing of this because there's another shoe to drop, is it because the loyalty division sale is moving along, or something else.

 

Doesn't seem all that crazy. They want to focus the business as a Cards business, thus putting the president of Cards in the CEO chair. Additionally, there has been a lot of criticism from both the buy side and sell side of how Heffernan has managed the strategic review. His communication has been terrible, putting things on the record multiple times that had he had no business putting out there. Those two things, plus the fact that he's presided over a 60% decline in the stock over the past 4 years (keep in mind, that's almost as bad as their performance during the GFC, and that only lasted 2 years peak to trough!) and it's not that surprising that he was replaced.

[Broeb22]

I'm scratching my head though as in I get the reason (i.e., they're likely going to sell loyalty division and you're going to be left with the card business), but doesn't this just seem crazy abrupt - unless if I'm missing something. I known Horn (the CFO) had announced he was leaving and was hanging out until transition, but Heffernan (the CEO) was working on this transition and seems like the board gave him the boot abruptly. Granted they had been missing targets for past couple of years or so. So was the timing of this because there's another shoe to drop, is it because the loyalty division sale is moving along, or something else.

 

Doesn't seem all that crazy. They want to focus the business as a Cards business, thus putting the president of Cards in the CEO chair. Additionally, there has been a lot of criticism from both the buy side and sell side of how Heffernan has managed the strategic review. His communication has been terrible, putting things on the record multiple times that had he had no business putting out there. Those two things, plus the fact that he's presided over a 60% decline in the stock over the past 4 years (keep in mind, that's almost as bad as their performance during the GFC, and that only lasted 2 years peak to trough!) and it's not that surprising that he was replaced.

 

Agree with glory. The company is basically de-conglomerating in a sense, so getting rid of a layer of management makes sense, even if most companies don't do it.

[adhital]

I'm scratching my head though as in I get the reason (i.e., they're likely going to sell loyalty division and you're going to be left with the card business), but doesn't this just seem crazy abrupt - unless if I'm missing something. I known Horn (the CFO) had announced he was leaving and was hanging out until transition, but Heffernan (the CEO) was working on this transition and seems like the board gave him the boot abruptly. Granted they had been missing targets for past couple of years or so. So was the timing of this because there's another shoe to drop, is it because the loyalty division sale is moving along, or something else.

 

Doesn't seem all that crazy. They want to focus the business as a Cards business, thus putting the president of Cards in the CEO chair. Additionally, there has been a lot of criticism from both the buy side and sell side of how Heffernan has managed the strategic review. His communication has been terrible, putting things on the record multiple times that had he had no business putting out there. Those two things, plus the fact that he's presided over a 60% decline in the stock over the past 4 years (keep in mind, that's almost as bad as their performance during the GFC, and that only lasted 2 years peak to trough!) and it's not that surprising that he was replaced.

 

Agree with glory. The company is basically de-conglomerating in a sense, so getting rid of a layer of management makes sense, even if most companies don't do it.

 

At the end of the day, trying to please the street by projecting rosy numbers doesn’t really help. I think this is what got him to trouble – CORE vs GAAP, rosy market/growth projections etc. Never he said, “ yes, we are slowing down and we’re trying our best but we cant be sure” . Just look at CACC – they don’t even bother to give pre-quarterly remarks let alone the estimates. Just plain Q&A and they constantly under promise and over deliver. This is what a new CEO at OZM is doing. Keep your heads down and deliver.

 

Investors are smart and management needs to treat them such. I hope this new CEO is strong as she seems to be. My suggestion: Don’t give any projections. No forecast. Let the number speak by itself.  Focus on getting the clients, work on widening the moat, get the market share. Above all just focus on capital allocation. GAAP EPS and everything else should take care by default. 

 

 

 

[Foreign Tuffett]

Two issues that I think are pertinent, since I see lots of discussion here about selling Loyalty One:

 

1) Won't they have a big tax tax bill if they sell Loyalty One?

 

2) Will there be pressure to regulate the entire company as a bank holding company if Loyalty One is disposed of?

 

 

I'm surprised that there's not more talk here about Synchrony moving onto ADS' turf. I don't actually think what ADS does is rocket science, and with Epsilon gone competitors might smell blood in the water.

 

https://www.spglobal.com/marketintelligence/en/news-insights/trending/nci6kxkmhbxrmiypvbscqg2

[KCLarkin]

https://www.spglobal.com/marketintelligence/en/news-insights/trending/nci6kxkmhbxrmiypvbscqg2

 

Are there any other recent examples of a retailer moving a portfolio away from ADS to a competitor?

[glorysk87]

Two issues that I think are pertinent, since I see lots of discussion here about selling Loyalty One:

 

1) Won't they have a big tax tax bill if they sell Loyalty One?

 

2) Will there be pressure to regulate the entire company as a bank holding company if Loyalty One is disposed of?

 

 

I'm surprised that there's not more talk here about Synchrony moving onto ADS' turf. I don't actually think what ADS does is rocket science, and with Epsilon gone competitors might smell blood in the water.

 

https://www.spglobal.com/marketintelligence/en/news-insights/trending/nci6kxkmhbxrmiypvbscqg2

 

For #1 - no solid answer, but the cost basis is relatively small so yes they'd likely have a tax bill. That's not exactly out of the ordinary though. Particularly if they're positioning the cards business as a standalone so that it's an attractive acquisition target for one of the larger credit card companies.

 

For #2 - To lose non-bank hold co status the banks would have to either a) grow to over $50B in assets or b) be considered a systemic risk. Neither are likely to occur in any reasonable time frame.

 

As for SYF moving onto ADS' turf. I'm not sure that's really the case. A lot of times when SYF gains a customer it's because they've gained the scale to do the analytics and loyalty portion in-house, so they feel comfortable leaving ADS and going to SYF so they can earn the RSA which they don't get with ADS. Again though, that's speculation. Unless SYF winning clients off ADS becomes a pattern I wouldn't be too worried.

[decko]

what is the main catalyst for ADS to be recognized by Mr Market?  Is it more bookings (more customers)? Revenue? or just normal bottom line growth?

[KCLarkin]

what is the main catalyst for ADS to be recognized by Mr Market?  Is it more bookings (more customers)? Revenue? or just normal bottom line growth?

 

Well, assuming this isn't a value trap:

- they will buy-back a very large portion of the float

- they've signed some very attractive new clients (Ikea, Sephora) that haven't fully ramped up yet. The hope is that the bleeding stops at their legacy accounts and the new accounts ramp-up.

 

But at current price, you don't need a catalyst. They just need to maintain current earnings and ROE. And then buyback like crazy.

[Spekulatius]

what is the main catalyst for ADS to be recognized by Mr Market?  Is it more bookings (more customers)? Revenue? or just normal bottom line growth?

 

I would argue that ADS right now is recognized by Mr Market correctly. Mr Market has stripped off the premium from phony cash earnings and values the company based on GAAP earnings, just like its peers.

[vince]

I would argue that if the market is in fact valuing ADS correctly it is because of mismanagement and unskillful allocation of capital.  If the market were to value ADS relative to it's peers, it would certainly take into account it's superior historic growth rate at much superior returns on equity.  The market is obviously skeptical on ADS repeating that kind of business performance, partly because of a changing retail landscape and partly because of mismanagement.  Not that it matters but it is my opinion that enough of ADS's unique position remains intact to continue with a good growth rate at good returns AND ultimately a better multiple.  The probability of loss multiplied by potential loss vs probability of gain multiplied by potential gain looks very favorable to me.

[vince]

And in case it looks like I'm harping on mgmt just to agree with recent developments, please take a look at what I have posted on this board regarding mgmt previously.

[dbuch]

what is the main catalyst for ADS to be recognized by Mr Market?  Is it more bookings (more customers)? Revenue? or just normal bottom line growth?

 

I would argue that ADS right now is recognized by Mr Market correctly. Mr Market has stripped off the premium from phony cash earnings and values the company based on GAAP earnings, just like its peers.

 

I disagree, I think ADS looks very cheap for a 30% ROE company that has grown receivables 14% plus average since 2006. Cash EPS mostly adds back amortization of purchased intangibles. They acquired Conversant for $2.3B which was mostly intangibles assets. With Epsilon gone the delta between "Cash EPS" and GAAP should compress.

 

We'll see if the management change up helps but I think they mostly sold off on disappointment in the stock repo and the tax leakage, not to mention who wants to own a credit card company exposed to retail with a possible recession coming. SYF, COF and DFS trade at similar multiples but i would argue ADS has a higher ROE and growth profile and should trade at a premium. 

 

NCOs hit 9.3% in 2009 and 8.9% in 2010 and then dropped to sub 5% for 5 years so they would likely over-earn post a recession but i think a lot of people just don't want to own financials as they assume the next recession looks like the GFC.