ADS - Alliance Data Systems

[WneverLOSE]

Well it's quite clear everything beside the Cards business is going, they basically said so on the conference call...

Lot's of waiting and seeing on this one.

1) Value destroying asset dispositions (Non tax efficient, low cost basis)

2) P/E is very low but it may be a false image (Can they really stay at 30+% when competitors are getting more and more data focused, when the economic cycle turns, when other forms of payments are potential, when more and more activity is going online and data is easier to gather)

3) How much grow will there be ? yes, they will talk about active clients growth, but net net looking at CR now and in 10 years, what CAGR will it have ? they can keep active clients growing at any rate they want as long as they move all of the clients that don't meet the benchmark out of that group.

 

my 2 cents :

Might be a winning stock but not in the short term, lots of medium to long term unknowns and concerns weighing on the stock price.

saying that I hold a large position that I bought and I'm quite deep in the red. :-[

well, long term investing comes with long term pain and uncertainty  :P

[vince]

I think the price more than reflects the risks and there is no evidence whatsoever the potential changes you are concerned about.  Instead of putting too much weight on unknowns, I would focus on the facts.  They have added an impressive lineup of clients and there is no reason why end customer sales and receivables will not "spool up" at a rate resembling historical figures.  They lost some customers yes, but they more than replaced the lost earnings but the street is acting like they are in a slow terminal decline.  Another big positive is the change in mgmt.  Already we were given a few new figures that you would think were basic communications and I can't imagine the new CEO not continuing down the path of highlighting the advantages, and most importantly, the few critical drivers of those advantages.  The new CEO was given a huge gift....the chance to easily improve the performance of the top job by just communicating in a way that makes it easier for average investors to measure what counts.

[chompsterama]

Well it's quite clear everything beside the Cards business is going, they basically said so on the conference call...

Lot's of waiting and seeing on this one.

1) Value destroying asset dispositions (Non tax efficient, low cost basis)

2) P/E is very low but it may be a false image (Can they really stay at 30+% when competitors are getting more and more data focused, when the economic cycle turns, when other forms of payments are potential, when more and more activity is going online and data is easier to gather)

3) How much grow will there be ? yes, they will talk about active clients growth, but net net looking at CR now and in 10 years, what CAGR will it have ? they can keep active clients growing at any rate they want as long as they move all of the clients that don't meet the benchmark out of that group.

 

my 2 cents :

Might be a winning stock but not in the short term, lots of medium to long term unknowns and concerns weighing on the stock price.

saying that I hold a large position that I bought and I'm quite deep in the red. :-[

well, long term investing comes with long term pain and uncertainty  :P

 

I think your points 2 and 3 are where a lot of the worry lies.  Since getting involved with ADS, I have generally thought the terminal value of the business was decent and I think it's priced as being poor.  Most analysts/people I've talked with share your point which holds some type of belief that says in one way or another: ADS’ days are finite. The reason I have thought there will long be a place for an ADS/Epsilon type business is basically that, over the long run, retailers need to own their customer – it’s cheaper and better. Margins are better without a middle-man, retargeting is much easier and with a much higher hit rate, and customer acquisition costs plummet (ie current customers become much more valuable)  The ADS model has already shown all this, but it's hard to imagine it will continue to in an Amazon/online world. This post does a pretty good job of explaining my thoughts and why the terminal value of ADS might be decent: https://www.perell.com/blog/amazon-arbitrage?mc_cid=813f705f00&mc_eid=09e226dc06.  In short, (smaller) retailers need the capabilities of ADS to have a fighting chance of long-term viability.  It's really just up to ADS to execute well and show these retailers they can do it better than the retailer can by themselves.  In ADS' sandbox, that seems more likely than in SYF's sandbox where huge retailers have more resources to play with all their data.  In other words, I think there will be plenty of ways for ADS to play in the future if they can execute on their business and resist resting on their historical successful laurels.  IDK, maybe even more ways for them to play vs their historical bricks and mortar model (due to more online sales generally gathering more customer data, that data being easier to collect, etc.)   

[Broeb22]

How relevant is the data ADS captures to a digital-first retailer like a Warby Parker or any of the other thousands of companies when they have click-by-click info on not just actual customers but potential customers that did not follow through on a purchase basket for whatever reason?

[Foreign Tuffett]

How relevant is the data ADS captures to a digital-first retailer like a Warby Parker or any of the other thousands of companies when they have click-by-click info on not just actual customers but potential customers that did not follow through on a purchase basket for whatever reason?

 

That's a really good question.

 

My initial assumption is that a core competency of so-called "digital native" retailers would be collecting and parsing this sort of data. So, ADS' data and analysis probably wouldn't be terribly relevant/helpful? Or perhaps just less helpful than it is to traditional mall-based retailers?

 

 

 

[chompsterama]

It is a good question, and that's why ADS needs to execute well because they can compete for that business (though I don't think they currently are or want to).  However, I don't think most people go into retail as data scientists like Warby Parker.  Perhaps that changes in the future with "other thousands" of small retailers as they realize the only holy grail to create touchpoints that are really engaging, be hyper attentive to customer needs and preferences, and reward loyalty with ever-increasing brand experiences is through being a data scientist.  ADS has a chance to grab that if the retailer doesn't want to, doesn't know how to build it, or can't (afford) to have an internal team do it.  ADS just needs a niche, not anywhere near all of it.  When bringing up the Warby Parker's (everyone's favorite example of what DTC will do to "old" retail - although essilorluxottica seems to be doing okay...), what matters is the % of retail that goes DTC or "digital native".  Sure Warby Parker, Casper, Bonobos, Barkbox, and Harry's go DTC.  Those look to be obvious successes, but will they take over retail sales?  Dunno.  If they do, how fast?  Retail sales in the US is something around $5.4 *T*rillion.  If you were concerned that was going to happen with speed, there are a lot of REITs, retailers, cities, and ad firms that should go close to zero.  Again, I think the market already believes your point somewhat that this is going on and believes it will (kinda) fast.  Maybe, just maybe the extent of Warby domination could be overhyped or the speed at which Warby domination occurs could be over expected (like we're all finding out with driverless cars to market) for a business like ADS to not bleed uncontrollably from it. 

 

I'll ask this at investor day.   

[LowIQinvestor]

ADS just bought back 9.9% of shares outstanding

 

reminds me of when they did this in 2008-2009

 

https://seekingalpha.com/news/3492530-alliance-data-buy-back-9_9-percent-shares-tender-offer

[ander]

ADS just bought back 9.9% of shares outstanding

 

reminds me of when they did this in 2008-2009

 

https://seekingalpha.com/news/3492530-alliance-data-buy-back-9_9-percent-shares-tender-offer

 

Why the 5% down - why's Mr. Market unhappy: Credit card data, DB downgrade, or the tender price was below where the stock was trading (actually better for value of stock)?

[glorysk87]

Why the 5% down - why's Mr. Market unhappy: Credit card data, DB downgrade, or the tender price was below where the stock was trading (actually better for value of stock)?

 

Technical pressure. 13mm shares were tendered implying some ppl bought shares ahead of the tender with the expectation that they'd be able to tender them at a small profit. Tender came in well below the expected price which made all those tender trades unprofitable. Since 13mm shares were tendered and only 5mm were bought back, that leaves 7mm shares that needed to be dumped today to get out of the trade.

[LowIQinvestor]

Why the 5% down - why's Mr. Market unhappy: Credit card data, DB downgrade, or the tender price was below where the stock was trading (actually better for value of stock)?

 

Technical pressure. 13mm shares were tendered implying some ppl bought shares ahead of the tender with the expectation that they'd be able to tender them at a small profit. Tender came in well below the expected price which made all those tender trades unprofitable. Since 13mm shares were tendered and only 5mm were bought back, that leaves 7mm shares that needed to be dumped today to get out of the trade.

 

Good explanation! thanks

 

Just saw that Arlington Value added significantly to ADS in Q2

 

Now his 2nd largest position outside of Berkshire!

 

https://www.dataroma.com/m/holdings.php?m=AV

 

 

[mwtorock]

Why the 5% down - why's Mr. Market unhappy: Credit card data, DB downgrade, or the tender price was below where the stock was trading (actually better for value of stock)?

 

Technical pressure. 13mm shares were tendered implying some ppl bought shares ahead of the tender with the expectation that they'd be able to tender them at a small profit. Tender came in well below the expected price which made all those tender trades unprofitable. Since 13mm shares were tendered and only 5mm were bought back, that leaves 7mm shares that needed to be dumped today to get out of the trade.

 

Good explanation! thanks

 

Just saw that Arlington Value added significantly to ADS in Q2

 

Now his 2nd largest position outside of Berkshire!

 

https://www.dataroma.com/m/holdings.php?m=AV

 

Also some people dumped it entirely in Q2 (Glenn Greenberg- https://dataroma.com/m/m_activity.php?m=CCM&typ=a).

 

[LowIQinvestor]

This feels like forced selling/ capitulation

 

I bought some today

 

Don't forget that they are expecting mid-teens, low teens growth rate from active AR in the back half of the year.

[kab60]

I'm very overweight but bought more as well. Active receivables grew 16 pct in July. Incl buybacks we're around 6x2020 earnings?

[HJ]

Finally looked into the 10Q a bit given how much the stock has sold off.  Is it right that the company has less than $1 billion of tangible net worth if you exclude all the good will & intangibles?  All this against a $17 billion credit card portfolio?

[Peregrine]

Finally looked into the 10Q a bit given how much the stock has sold off.  Is it right that the company has less than $1 billion of tangible net worth if you exclude all the good will & intangibles?  All this against a $17 billion credit card portfolio?

 

Not the right way to look at it given that Epsilon and LoyaltyOne - which account for most of the goodwill - are still on the books. Their bank subs, Comenity Bank and Comenity Capital Bank, which house the receivables, has CET1 ratios of 14-15%.

[KCLarkin]

Finally looked into the 10Q a bit given how much the stock has sold off.  Is it right that the company has less than $1 billion of tangible net worth if you exclude all the good will & intangibles?  All this against a $17 billion credit card portfolio?

 

A substantial portion of the credit card portfolio is held by non-recourse securitization entities.

[glorysk87]

Little bit surprised how far this is trading off in the past few days. Originally thought the tender arbs were pressuring the price, but now we're 3 days on and I'm not sure. Could be a big holder dumping their position I guess.

[chompsterama]

Finally looked into the 10Q a bit given how much the stock has sold off.  Is it right that the company has less than $1 billion of tangible net worth if you exclude all the good will & intangibles?  All this against a $17 billion credit card portfolio?

 

A substantial portion of the credit card portfolio is held by non-recourse securitization entities.

 

Roughly 40% I believe

[abitofvalue]

Finally looked into the 10Q a bit given how much the stock has sold off.  Is it right that the company has less than $1 billion of tangible net worth if you exclude all the good will & intangibles?  All this against a $17 billion credit card portfolio?

 

A substantial portion of the credit card portfolio is held by non-recourse securitization entities.

 

The notion that these are "non-recourse" is a joke. the day a securitization trust fails is the day ADS fails.  they will have zero fundraising ability.  That said, think Frank87 is looking at it correctly.  The finco has substantial assets and adequate capital.

 

Best guess on recent pressure - shows there are a lot of investors looking to sell and i suspect a good portion of the 7M shares they didnt accept are in the process of being liquidated.

 

At sub-$140, i think its starting to get more interesting. Still not convinced that they deserve a multiple higher than SYF but downside seems more protected now.  I dont really believe they are meaningfully better at marketing and think their faster growth is offset by SYF's scale and better mouse trap (profit-share vs royalty), and more diversified products - dual card, non-card businesses). need to think through what their real growth and recession credit looks like - their portfolio / growth will be meaningfully different making comparisons to 2008 almost meaningless imo.

 

 

 

[Peregrine]

Finally looked into the 10Q a bit given how much the stock has sold off.  Is it right that the company has less than $1 billion of tangible net worth if you exclude all the good will & intangibles?  All this against a $17 billion credit card portfolio?

 

A substantial portion of the credit card portfolio is held by non-recourse securitization entities.

 

The notion that these are "non-recourse" is a joke. the day a securitization trust fails is the day ADS fails.  they will have zero fundraising ability.  That said, think Frank87 is looking at it correctly.  The finco has substantial assets and adequate capital.

 

Best guess on recent pressure - shows there are a lot of investors looking to sell and i suspect a good portion of the 7M shares they didnt accept are in the process of being liquidated.

 

At sub-$140, i think its starting to get more interesting. Still not convinced that they deserve a multiple higher than SYF but downside seems more protected now.  I dont really believe they are meaningfully better at marketing and think their faster growth is offset by SYF's scale and better mouse trap (profit-share vs royalty), and more diversified products - dual card, non-card businesses). need to think through what their real growth and recession credit looks like - their portfolio / growth will be meaningfully different making comparisons to 2008 almost meaningless imo.

 

FYI, Alliance has dramatically increased their direct deposits as a mix of their funding compared to 10 years ago when their receivables were almost entirely funded by securitization.

[KCLarkin]

The notion that these are "non-recourse" is a joke. the day a securitization trust fails is the day ADS fails.  they will have zero fundraising ability.

 

Perhaps. But if you are only retaining 10% of the risk, you clearly need less equity to support the receivables.

[Peregrine]

The notion that these are "non-recourse" is a joke. the day a securitization trust fails is the day ADS fails.  they will have zero fundraising ability.

 

Perhaps. But if you are only retaining 10% of the risk, you clearly need less equity to support the receivables.

 

The risk-weights on securitized credit card receivables aren't really different from those held at the bank as they don't qualify for securitization under Basel III capital rules. So there isn't much capital relief from securitizing credit card receivables.

[KCLarkin]

The risk-weights on securitized credit card receivables aren't really different from those held at the bank as they don't qualify for securitization under Basel III capital rules. So there isn't much capital relief from securitizing credit card receivables.

 

Thanks for the clarification.

[Okonomen]

Aren't many f ADS' customers in various challenged retail environments such as furniture, apparel etc? Isnt that a threat that their customer base is experiencing declining SSS and sales?

[kab60]

Aren't many f ADS' customers in various challenged retail environments such as furniture, apparel etc? Isnt that a threat that their customer base is experiencing declining SSS and sales?

Yes. They've got some challenged retailers in their portfolio and some they've gotten rid of. And some that are doing more than fine and are still in their early innings in regarda to growing receivables (Ikea, Sephora etc). Fact is active receivables grew 16 pct y/o/y in July (and their guidance is for that to continue). It is pulled down by all that is retail while growing double digit at high incremental ROIC. I like the business economics and that it's a diversified play on retail. Even if clients fail (like BonBon and Gander) their end clients are the shoppers, and with low gas prices, high employment and rates dropping like a rock (and consumer debt levels not very frightening) I think they'll be fine. I struggle somewhat with the terminal value, but around these levels I'm not too worried about that. Biggest risk is that it is a credit card Company/financial and they tend to surprise to the downside. Despite the huge drop I think the card biz is doing great.