ADS - Alliance Data Systems

[RVP]

Just my two cents:

 

Guidance/ management credibility is secondary to one's own understanding of the operational drivers and prospects of the business franchise. In the same vein, trading activities by other funds - while certainly entertaining - shouldn't really dictate decision making. If you can't make an independent assessment of the business's long-term value, perhaps it belongs in the too hard pile.

[undervalued]

Is the market considering this as a company about to die? ROE at 20+ and it's trading at 4x2020 estimates. @kab I too am sitting at large loss. Is market thinking ADS won't be there in 5 years or sooner?

[Spekulatius]

Is the market considering this as a company about to die? ROE at 20+ and it's trading at 4x2020 estimates. @kab I too am sitting at large loss. Is market thinking ADS won't be there in 5 years or sooner?

 

Mr Market believes the real earnings are closer to GAAP earnings. The “core” earnings that ADS is promoting are certainly BS.

[peridotcapital]

Is the market considering this as a company about to die? ROE at 20+ and it's trading at 4x2020 estimates. @kab I too am sitting at large loss. Is market thinking ADS won't be there in 5 years or sooner?

 

Mr Market believes the real earnings are closer to GAAP earnings. The “core” earnings that ADS is promoting are certainly BS.

 

The analyst community keeps asking them to scrap "core EPS" so they can be compared with credit card peers like SYF and DFS on an apples to apples basis. For whatever reason, they refuse. If GAAP EPS was actually going to be $20 next year I doubt it would trade at 5x today.

 

If only they could actually hit their numbers for a change. Unfortunately, they seem to be delusional about the underlying growth rate of the card business. On the call today, when asked, they claimed that investors should expect the normalized long-term revenue growth rate to be "high single digits." How on earth can this business grow at 4x the rate of GDP? It's not like private label credit cards are a secular growth story...

[Spekulatius]

Is the market considering this as a company about to die? ROE at 20+ and it's trading at 4x2020 estimates. @kab I too am sitting at large loss. Is market thinking ADS won't be there in 5 years or sooner?

 

Mr Market believes the real earnings are closer to GAAP earnings. The “core” earnings that ADS is promoting are certainly BS.

 

I have last quarters earnings at around $3.5/share adding back the cost of debt extinguishment. Their earnings are collapsing so no idea what they will make in the future. Even at this point, I don’t think it’s necessarily cheaper than DFS for example, considering the risk and the uncertainly with ADS.

 

The analyst community keeps asking them to scrap "core EPS" so they can be compared with credit card peers like SYF and DFS on an apples to apples basis. For whatever reason, they refuse. If GAAP EPS was actually going to be $20 next year I doubt it would trade at 5x today.

 

If only they could actually hit their numbers for a change. Unfortunately, they seem to be delusional about the underlying growth rate of the card business. On the call today, when asked, they claimed that investors should expect the normalized long-term revenue growth rate to be "high single digits." How on earth can this business grow at 4x the rate of GDP? It's not like private label credit cards are a secular growth story...

[kab60]

Just my two cents:

 

Guidance/ management credibility is secondary to one's own understanding of the operational drivers and prospects of the business franchise. In the same vein, trading activities by other funds - while certainly entertaining - shouldn't really dictate decision making. If you can't make an independent assessment of the business's long-term value, perhaps it belongs in the too hard pile.

Sure, but this is a Credit Card Company, a bank, a subprime lender. Credibility is important. They have plus 150 clients. I cant verify whether they lower their hurdle rates (I can in a couple of years). Nor how badly their clients are doing (again, some I can - not all). Again, I think the business is doing fine overall (badco/goodco), but I don't like them giving guidance (and being very confident about it - high degree of visibility) and then deliver what they did yesterday. Like the increased provision was a surprise. Or higher prime rates. Or costs of paying off debt. Apart from the disastrous communication it begs the question as to whether or not they have any visibility and a handle on the business. Makes the middle part of their name somewhat of a joke. And it's a shame since new management could've reset expectations and worked from there. Like why even guide to 2020 mid-high 20'ties BS earnings growth in 2020 when you can't hit Q2 guidance in Q3?

[RVP]

Just my two cents:

 

Guidance/ management credibility is secondary to one's own understanding of the operational drivers and prospects of the business franchise. In the same vein, trading activities by other funds - while certainly entertaining - shouldn't really dictate decision making. If you can't make an independent assessment of the business's long-term value, perhaps it belongs in the too hard pile.

Sure, but this is a Credit Card Company, a bank, a subprime lender. Credibility is important. They have plus 150 clients. I cant verify whether they lower their hurdle rates (I can in a couple of years). Nor how badly their clients are doing (again, some I can - not all). Again, I think the business is doing fine overall (badco/goodco), but I don't like them giving guidance (and being very confident about it - high degree of visibility) and then deliver what they did yesterday. Like the increased provision was a surprise. Or higher prime rates. Or costs of paying off debt. Apart from the disastrous communication it begs the question as to whether or not they have any visibility and a handle on the business. Makes the middle part of their name somewhat of a joke. And it's a shame since new management could've reset expectations and worked from there. Like why even guide to 2020 mid-high 20'ties BS earnings growth in 2020 when you can't hit Q2 guidance in Q3?

 

I hear you, and by no means am I implying that management shouldn't be on top of their game. However, I think if an appraisal of the business is overly reliant on forecasts management provides, it may be too much of a black box. In my opinion, any business that deals in short-term unsecured lending must have poor visibility from time to time (not always a bad thing). It doesn't mean they can't be understood, but I do think you'd have to assess them through cycles and not a few quarters. I agree that timing lag is a risk in terms of assessing their most recent underwriting discipline. But I think you have this risk for all banks/ lenders, and one could argue that the short-term nature of ADS's loans (as well as the monthly performance updates) should reveal any potential slip in discipline faster. 

 

[Peregrine]

Just my two cents:

 

Guidance/ management credibility is secondary to one's own understanding of the operational drivers and prospects of the business franchise. In the same vein, trading activities by other funds - while certainly entertaining - shouldn't really dictate decision making. If you can't make an independent assessment of the business's long-term value, perhaps it belongs in the too hard pile.

Sure, but this is a Credit Card Company, a bank, a subprime lender. Credibility is important. They have plus 150 clients. I cant verify whether they lower their hurdle rates (I can in a couple of years). Nor how badly their clients are doing (again, some I can - not all). Again, I think the business is doing fine overall (badco/goodco), but I don't like them giving guidance (and being very confident about it - high degree of visibility) and then deliver what they did yesterday. Like the increased provision was a surprise. Or higher prime rates. Or costs of paying off debt. Apart from the disastrous communication it begs the question as to whether or not they have any visibility and a handle on the business. Makes the middle part of their name somewhat of a joke. And it's a shame since new management could've reset expectations and worked from there. Like why even guide to 2020 mid-high 20'ties BS earnings growth in 2020 when you can't hit Q2 guidance in Q3?

 

I think it's quite obvious why management feels they can get to 20%+ core eps growth in 2020 - a massive share buy-back + return to AR growth + cost cuts + lower interest expenses. Not saying that they'll get it, of course.

[stahleyp]

I'm assuming I'm misunderstanding this but does valueact own 5.2 million shares here?

 

https://www.sec.gov/Archives/edgar/data/1101215/000141881219000069/ads13da7102419.txt

[Hielko]

I'm assuming I'm misunderstanding this but does valueact own 5.2 million shares here?

 

https://www.sec.gov/Archives/edgar/data/1101215/000141881219000069/ads13da7102419.txt

That's exactly what that means

[stahleyp]

I'm assuming I'm misunderstanding this but does valueact own 5.2 million shares here?

 

https://www.sec.gov/Archives/edgar/data/1101215/000141881219000069/ads13da7102419.txt

That's exactly what that means

 

Thanks.

 

That one is from VA Partners I, LLC

 

There is another one from ValueAct Holdings, L.P. that shows 3.7 million from last 13f.

 

https://www.sec.gov/Archives/edgar/data/1418814/000141881219000054/xslForm13F_X01/vac13f081419.xml

 

 

 

 

[undervalued]

When I looked at dataroma.com, I see ValueAct owns 5,207,646 in Q1 of 2019. They reduced their positions (converting to pref) to 3,707,646 in Q2 of 2019. Now that text you just linked says their holding is back to 5,207,646 as of Oct 24, 2019. I don't know whether this is accurate or not.

 

 

About board from Value Act stepping down:

 

ValueAct partner steps down from board at Citi credit rival

BY Reuters

— 11:09 AM ET 10/25/2019

Oct 25 (Reuters) - Credit card and loyalty programs firm Alliance Data Systems Corp ( ADS ) said a board member representing ValueAct Capital has stepped down, removing one conflict of interest which could have prevented it gaining a board seat at Citigroup Inc.

 

Alliance, which competes with Citi in issuing credit cards for retailers, said in a regulatory filing filed late on Thursday that Kelly Barlow, a partner at ValueAct, had stepped down from its board. (https://bit.ly/31LDkr5)

 

The San Francisco-based hedge fund, one of the industry's most closely-watched activist investors, unveiled a $1.2 billion stake in Citi in May last year which made it one of the top 10 shareholders of the third-biggest U.S. bank by assets.

 

In January this year, Citi agreed to give ValueAct more access to its books and board of directors, deepening their relationship.

 

The agreement gave ValueAct rights that essentially come with having a board seat, but the fund and the bank said that they only expected ValueAct to propose a candidate for the board when some potential conflicts of interest had been eliminated. (Reporting by Bharath Manjesh in Bengaluru; editing by Patrick Graham)

[vince]

Is the market considering this as a company about to die? ROE at 20+ and it's trading at 4x2020 estimates. @kab I too am sitting at large loss. Is market thinking ADS won't be there in 5 years or sooner?

 

Mr Market believes the real earnings are closer to GAAP earnings. The “core” earnings that ADS is promoting are certainly BS.

 

The analyst community keeps asking them to scrap "core EPS" so they can be compared with credit card peers like SYF and DFS on an apples to apples basis. For whatever reason, they refuse. If GAAP EPS was actually going to be $20 next year I doubt it would trade at 5x today.

 

If only they could actually hit their numbers for a change. Unfortunately, they seem to be delusional about the underlying growth rate of the card business. On the call today, when asked, they claimed that investors should expect the normalized long-term revenue growth rate to be "high single digits." How on earth can this business grow at 4x the rate of GDP? It's not like private label credit cards are a secular growth story...

 

I agree that they should redefine their earnings.  However "high single digits" is not 4 times GDP, probably makes sense to use nominal GDP.  And historically they have grown their accounts receivables (the driver of revenue growth) by a mid teens rate so I don't believe that their guidance is unreasonable.  In addition they know from experience how new client private label receivables scale up over the first few years and what penetration they ultimately achieve.  Leaving aside recessions, they do have some clarity as to their future growth rate. 

[stahleyp]

When I looked at dataroma.com, I see ValueAct owns 5,207,646 in Q1 of 2019. They reduced their positions (converting to pref) to 3,707,646 in Q2 of 2019. Now that text you just linked says their holding is back to 5,207,646 as of Oct 24, 2019. I don't know whether this is accurate or not.

 

 

About board from Value Act stepping down:

 

ValueAct partner steps down from board at Citi credit rival

BY Reuters

— 11:09 AM ET 10/25/2019

Oct 25 (Reuters) - Credit card and loyalty programs firm Alliance Data Systems Corp ( ADS ) said a board member representing ValueAct Capital has stepped down, removing one conflict of interest which could have prevented it gaining a board seat at Citigroup Inc.

 

Alliance, which competes with Citi in issuing credit cards for retailers, said in a regulatory filing filed late on Thursday that Kelly Barlow, a partner at ValueAct, had stepped down from its board. (https://bit.ly/31LDkr5)

 

The San Francisco-based hedge fund, one of the industry's most closely-watched activist investors, unveiled a $1.2 billion stake in Citi in May last year which made it one of the top 10 shareholders of the third-biggest U.S. bank by assets.

 

In January this year, Citi agreed to give ValueAct more access to its books and board of directors, deepening their relationship.

 

The agreement gave ValueAct rights that essentially come with having a board seat, but the fund and the bank said that they only expected ValueAct to propose a candidate for the board when some potential conflicts of interest had been eliminated. (Reporting by Bharath Manjesh in Bengaluru; editing by Patrick Graham)

 

Thanks under. I'm assuming that first filing is combining their common and preferred then.

[abitofvalue]

sometimes being lucky is a blessing.. i thought it was cheap pre-earnings but decided not to buy.. and phew..

 

This management team just took what little credibility it had (which came from being Not-Ed) and flushed it down the toilet..

 

Didnt they raise guidance a touch last quarter? and now claim they didnt account for lower fed reserve rates.. who exactly didnt know in July that the Fed would be cutting rates..  at a minimum dont fucking raise guidance..  whats more they are still not accounting for additional rate cuts.  so when the fed cuts, they will turn around and say oh wow now we are cutting our EPS guide and piss over a potentially alright quarter, delaying by another quarter the point at which they report a clean number..  it's like they are surprised the market doesnt like a guidance cut.

 

You want to talk about the business and not guidance... fine lets look at receivables.

 

They said as late as last quarter we are comfortable with the $20B+ end-of-year figure.  not oh we had deterioration in core businesses so we are guiding down...  till very recently the messaging was.. hey we are cleaning up our portfolio of bankrupt and non-strategic portfolio's so we'll be back at mid-teens growth that we have historically delivered.. we have 'spooling of new vintages' blah blah..  now its oh we'll grow single digits near-term.  um what!!?? If your new vintages are going from $5B to $13B in <3 yrs (since she said on the call ~3.5 yrs to get to size)...  so lets be generous and say 'spooling' is going to get them 2.5B a year.. for next 2 yrs.. well on <$20B thats already 10%+ growth.. so what exactly is going on in the rest of the portfolio..  and keep in mind the guide includes new portfolio launches and smaller acquisitions...  so what are the odds we get more held for sale in the next yr or two?

 

Btw - Held-for-sale had a writedown this quarter too and is goign to take longer to sell... did they explain the write-down beyond mark-to-market.. like why did the market value decline. One wonders if the assets were simply not as good as they thought and the market for them is limited..

 

 

 

Capital allocation..

well they seem proud that they bought back $750M shares at $148...  not even sure why you would say something so stupid.. but i guess thats the risk of a newbie public co cfo.  I mean its amazing that they knew they were going to cut guidance and didnt think about the impact on the stock price of that...

 

LoyaltyOne - are they going to sell it or not? who knows..  they said resturcting done so ValueAct leaving but then didnt clear up the confusion around LoyaltyOne...  i get they royally mesed up the Epsilon messaging but now they've gone to the other extreme of just not saying anything after heavily hinting that they would sell it..

 

btw - have they articulated why they think Core earnings is relevant now that Epsilon is gone? I see them talk about why tangible ROE isnt right but they've been asked multiple times about Gaap eps.. 

 

I think this was the only card company that didnt get asked about CECL.. i cant tell if its because the rest of the company is such a cluster- that ppl arent focused on it or if its because no one will believe what they say anyway.  my prediction is that will be the next ugly surprise.. their nonsense of no material increase due to CECL as these are short-term receivables will be so different than the rest of the market that investors will fear a reserve build is around the corner and value it as such.. or they will increase reserves more than ppl are expecting next quarter. i dont believe for a second they can have 'non-material' (since changed to 10-15% iirc)...   

 

 

 

 

[vince]

sometimes being lucky is a blessing.. i thought it was cheap pre-earnings but decided not to buy.. and phew..

 

This management team just took what little credibility it had (which came from being Not-Ed) and flushed it down the toilet..

 

Didnt they raise guidance a touch last quarter? and now claim they didnt account for lower fed reserve rates.. who exactly didnt know in July that the Fed would be cutting rates..  at a minimum dont fucking raise guidance..  whats more they are still not accounting for additional rate cuts.  so when the fed cuts, they will turn around and say oh wow now we are cutting our EPS guide and piss over a potentially alright quarter, delaying by another quarter the point at which they report a clean number..  it's like they are surprised the market doesnt like a guidance cut.

 

You want to talk about the business and not guidance... fine lets look at receivables.

 

They said as late as last quarter we are comfortable with the $20B+ end-of-year figure.  not oh we had deterioration in core businesses so we are guiding down...  till very recently the messaging was.. hey we are cleaning up our portfolio of bankrupt and non-strategic portfolio's so we'll be back at mid-teens growth that we have historically delivered.. we have 'spooling of new vintages' blah blah..  now its oh we'll grow single digits near-term.  um what!!?? If your new vintages are going from $5B to $13B in <3 yrs (since she said on the call ~3.5 yrs to get to size)...  so lets be generous and say 'spooling' is going to get them 2.5B a year.. for next 2 yrs.. well on <$20B thats already 10%+ growth.. so what exactly is going on in the rest of the portfolio..  and keep in mind the guide includes new portfolio launches and smaller acquisitions...  so what are the odds we get more held for sale in the next yr or two?

 

Btw - Held-for-sale had a writedown this quarter too and is goign to take longer to sell... did they explain the write-down beyond mark-to-market.. like why did the market value decline. One wonders if the assets were simply not as good as they thought and the market for them is limited..

 

 

 

Capital allocation..

well they seem proud that they bought back $750M shares at $148...  not even sure why you would say something so stupid.. but i guess thats the risk of a newbie public co cfo.  I mean its amazing that they knew they were going to cut guidance and didnt think about the impact on the stock price of that...

 

LoyaltyOne - are they going to sell it or not? who knows..  they said resturcting done so ValueAct leaving but then didnt clear up the confusion around LoyaltyOne...  i get they royally mesed up the Epsilon messaging but now they've gone to the other extreme of just not saying anything after heavily hinting that they would sell it..

 

btw - have they articulated why they think Core earnings is relevant now that Epsilon is gone? I see them talk about why tangible ROE isnt right but they've been asked multiple times about Gaap eps.. 

 

I think this was the only card company that didnt get asked about CECL.. i cant tell if its because the rest of the company is such a cluster- that ppl arent focused on it or if its because no one will believe what they say anyway.  my prediction is that will be the next ugly surprise.. their nonsense of no material increase due to CECL as these are short-term receivables will be so different than the rest of the market that investors will fear a reserve build is around the corner and value it as such.. or they will increase reserves more than ppl are expecting next quarter. i dont believe for a second they can have 'non-material' (since changed to 10-15% iirc)... 

 

great post

[Peregrine]

I think guidance is stupid - period. It gets people overly-focused on short-term metrics. I know many demand it and many management teams capitulate to that demand but it doesn't do any good for either investors or management. How can anyone know with any precision what next quarter's numbers would look like? You beat guidance, you look like you overachieved but if you miss, you lose credibility. Over time, even a management team that's honest and has a realistic appraisal of its business will have its fair share of quarters with missed guidance. A lot of this is just noise from the vicissitudes of business.

[abitofvalue]

On your larger generic point about guidance being stupid - i agree with you. 

 

 

As annoying as we find the guidance game, its here to stay imo. Besides, the stock reacts to buyside expectations not sellside estimates so a miss / meet is ok for headlines but where buyside is calibrated is much more important. Investors are generally pretty good at knowing management guidance philosophy so you have situations where investors start expecting a beat and raise because management is always conservative and even a beat of sellside estimates is met with share price declines.. or you have realistic management teams that give a wide range and explain the moving parts.. ADS seems to have fallen in the third group that serially overpromises..  that they still dont learn is baffling.. 

 

I think we underestimate other investors when we think they focus on short-term metrics when we attribute big stock price movements to reactions to guidance / earnings misses..  In ADS case specifically, they just guided to single digit AR growth - i think that is much lower than many thought they could /should be able to do given their previous comments.  Also continuing problems in core portfolios are an overhang that is clearly not going away despite assurances that problem portfolios had been dealt with. Their ROE was also below their own 30% rule.. maybe a 1-time thing but given other headwinds and everything else management has been wrong about would you want to rely on their assurances that its a 30% ROE portfolio LT?  the stock reaction could just as easily be because investors are re-calibrating intrinsic value and incorporating new LT trends as it could be a reaction to lower 2019 guidance..

 

Given stocks trading at 7-10x earnings i dont know that the card companies are in a position to come out and say hey we wont do guidance anymore.  Most of them have moved towards giving more guidance in recent years... heck AXP just gave initial 2020 guidance in Q3 (think thats the first time they have done forward guidance like that in yrs).

 

[decko]

Do you think this is the bottom in stock price? 

[AzCactus]

Do you think this is the bottom in stock price?

 

If I knew that I would be filthy rich. 

[decko]

I would be too.. A year and a half ago I was between Synchrony and ADS, and eventually picked ADS thinking they were more undervalued.    SYF is up nearly 50% this year, outperforming, while ADS is down 30%.  A dramatic difference, especially in my pocket book and ego.  We are always learning and growing as investors, so feel free to give comments on where i went wrong.  I feel its a perfect example of when two horses look alike always pick the fastest (best in show).  If this is off base on the thread then please let me know. Im fairly new and want to follow guidelines.

[Peregrine]

I would be too.. A year and a half ago I was between Synchrony and ADS, and eventually picked ADS thinking they were more undervalued.    SYF is up nearly 50% this year, outperforming, while ADS is down 30%.  A dramatic difference, especially in my pocket book and ego.  We are always learning and growing as investors, so feel free to give comments on where i went wrong.  I feel its a perfect example of when two horses look alike always pick the fastest (best in show).  If this is off base on the thread then please let me know. Im fairly new and want to follow guidelines.

 

Hard to judge whether you were right or wrong by examining the stock price move of less than a year.

[Spekulatius]

I would be too.. A year and a half ago I was between Synchrony and ADS, and eventually picked ADS thinking they were more undervalued.    SYF is up nearly 50% this year, outperforming, while ADS is down 30%.  A dramatic difference, especially in my pocket book and ego.  We are always learning and growing as investors, so feel free to give comments on where i went wrong.  I feel its a perfect example of when two horses look alike always pick the fastest (best in show).  If this is off base on the thread then please let me know. Im fairly new and want to follow guidelines.

 

Hard to judge whether you were right or wrong by examining the stock price move of less than a year.

 

I agree with Decks that when in doubt, pick quality over valuation as a heuristic, unless it is a really unique situation (bottom of an economic cycle and huge valuation differential).

 

As for ADS vs SYC, the huge divergence in performance during the last 12 month has clearly shown who is correct or not.

 

Personally, my pick in this sector would be DFS and maybe I restart COF (more diversified and not a pure play CC company) again.

[Peregrine]

I would be too.. A year and a half ago I was between Synchrony and ADS, and eventually picked ADS thinking they were more undervalued.    SYF is up nearly 50% this year, outperforming, while ADS is down 30%.  A dramatic difference, especially in my pocket book and ego.  We are always learning and growing as investors, so feel free to give comments on where i went wrong.  I feel its a perfect example of when two horses look alike always pick the fastest (best in show).  If this is off base on the thread then please let me know. Im fairly new and want to follow guidelines.

 

Hard to judge whether you were right or wrong by examining the stock price move of less than a year.

 

I agree with Decks that when in doubt, pick quality over valuation as a heuristic, unless it is a really unique situation (bottom of an economic cycle and huge valuation differential).

 

As for ADS vs SYC, the huge divergence in performance during the last 12 month has clearly shown who is correct or not.

 

Personally, my pick in this sector would be DFS and maybe I restart COF (more diversified and not a pure play CC company) again.

 

How has it "clearly" shown? If you use market tickers as the ultimate judge, then weren't those who bought Bitcoin in the middle of 2017 "clearly" right  at the end of 2017?

 

ADS may well start growing receivables again, and perhaps at higher rates than SYF given its smaller size. What if its stock outperforms SYF's? Would that "clearly" mean that he was right?

[Spekulatius]

How has it "clearly" shown? If you use market tickers as the ultimate judge, then weren't those who bought Bitcoin in the middle of 2017 "clearly" right  at the end of 2017?

 

ADS may well start growing receivables again, and perhaps at higher rates than SYF given its smaller size. What if its stock outperforms SYF's? Would that "clearly" mean that he was right?

 

If I am losing 50% On any investment, I am clearly wrong, there no if and when. If nothing else, the timing was wrong and timing, just as well as stock selection, is a critical part of any investment process.