ADS - Alliance Data Systems

[Ten7suited]

Iirc not all receivables are secured by ABS trusts. They also have equity, Corp debt and most importantly deposits financing a load of receivables.

 

The NCO difference is as you point out - diff NCO rates in the trust portfolio and remaining.  Yes diff portfolios perform very differently. Look at SYF - Walmart was a 9-10% loss rate portfolio while overall syf is a 6% loss rate portfolio.

 

Thanks for the response.  Understood that they finance the receivables in other ways too, but we are still missing details on $5bn that is financed through the securitization trusts that I would expect should be out there in some filing.  From the most recent 10-Q: "As of September 30, 2019, the WFN Trusts and the WFC Trust had approximately $12.5 billion of securitized credit card receivables."

 

The search continues...

[kab60]

As for the current valuation I have no clue... On the one hand it looks cheap, but at the same time there is a myriad of reasons why the current price could be the right one (e.g. more reserves to come for old portfolios, lower IRRs for new ones, already high niche real penetration/ market share, further deterioration of retail customers, etc).

I'm still trying to flesh out the bear case. On the last call an analyst triangulated that they took at 60m hit to their portfolios held for sale (2b). I'd assume they're getting rid of their worst clients/portfolios, but even if one assumed all their receivables were impaired, that would be a 600m hit. Hardly threatening. I'd also expect their costs to fund their receivables portfolios would increase - I've seen nothing in their filings to suggest so.

 

We'll see about ROE, despite a bad performance and little credibility, they committed to +30 pct. ROE. Their overoptimistic ways means we shouldn't take that at face value, but they'd be stupid as hell when they could kitchen sink (but hey, they seem stupid as hell communication wise, so hardly would be surprising).

 

Anyway, I'd say a decline in ROE is pretty much baked in. So I think we'd be good at these levels. So do they have a viable future - are their services needed?

 

Ulta Beauty has 33m loyalty members, and their members are much more valuable than non-members (last Ulta investor day has some interesting info), so it does seem like the value they create for their customers is anything but trivial. If it's all just about loose credit and about to unravel, I've somewhat hedged my bet by going long Ulta. :) Perhaps one should go long Lands End as well, since their new agreement should be a meaningful contributor to sales going forward. :)

 

Let me give you a few less optimistic points to consider - don't believe all of these but I do think a lot are plausible..  in general the thesis can be summed up as don't believe management or at least don't give these guys the benefit of the doubt...

 

1) held for sale portfolio - why assume they are their worst portfolios? They used to say it was M&A / bankruptcies.. now it's just ppl who weren't focused on card.. maybe it's struggling retailers we signed that we shouldn't have renewed..or had to renew for strategic reasons. Also if they have a shitty portfolio that would be a pain to sell they won't.. they know ppl look at this..  the fact that they are taking writedowns suggests they were way too optimistic in valuing them. Financial companies taking writedowns rarely have one bad mark.. it's usually a series of bad marks. Maybe ONLY these portfolios had bad marks.. maybe more who knows.

 

2) growth - what's the growth rate on receivables (not active receivables.. just receivables on balance sheet) in the next 3-5 yrs? Is it single digits as the new team said or is it mid teens that the old team said was likely.  What changed to basically halve it.. off a depressed base that has a ton of 'spooling' baked in..

 

3) why does their ROE have to be 30% vs SYF at 25% - decompose the individual line items and you will see it's all revenue driven.  They actually do worse on credit and Opex efficiency on a fully loaded baisis.. so what gives them the right to earn higher revenue yields.  Is it as the management team claims there is less competition cause they play in small retailers the big boys don't want or is it the other claim of better marketing...  Seems dubious to me.  Why wouldn't the bigger retailers want better marketing if ADS could deliver that? And seeing some of the subscale crap SYF has in the payment solutions and carecrdit them not being interested in small retailers seems like a maybe at best to me.    More likely it's the lower balances on ADS accts which drives yields as the fees (which are typically fixed $) are a bigger part of the yield.  This theory has the nice benefit of also being consistent with their worse credit..  so are 30 percent ROEs guaranteed as loan sizes increase ? I don't know but I question if the bulls are prepared for consistent ROEs below 30%..

 

4) nearterm guidance is going lower not higher (lower interest rates).  yes yes it's bullshit and we value investors care about intrinsic value.  But stocks go down when guidance is lowered or actual results miss guidance

 

5) CECL - bears expect either the actual results will be worse than guidance on day 1 or longer term. Lots of reasons for this but two are - their competitors are not stupid and all pointed to much bigger reserve building and some of ADS new clients / categories clearly have longer loan lifes than their old so the portfolio shift will drive day2 reserves higher than ppl are assuming.

 

6) relatedly they keep saying the new categories should perform the same as their historic in terms of credit but a jewelery or furniture deferred interest loan may not.. especially in a downturn. It's certainly a longer life loan which even they acknowledge.

 

7) loyaltyone - who is the buyer? Why do they want it.. other than PE that is.. since the cash flow profile is decent..  but PE firms aren't in the business of paying high multiples for a business with limited growth and some regulatory risk from a forced seller.  Their execution on epsilon reduces confidence

 

8) their non-gaap metrics are crap and on a gaap basis they aren't all that much cheaper than syf.. (well at least they didn't used to be)

 

9) competition for plcc is increasing - whether it's bnpl, non-plcc rewards or Just better gpcc rewards. The fact is plcc purchase volume as an industry has been anemic for the last two yrs. And the growth in. Non-card related rewards programs reduce the value prop of card programs.  Are Ulta's 33M members going to go get Ulta cards? Will Ulta reward those that dont to a lesser degree - yes but will it matter? .

 

10) well I don't have one of the top of my head but 10 is a nice number for a list -  so let's just go with cyclicall business with low quality management whose biggest customer is struggling so y would own late in the credit cycle. Can just buy cheaper if credit event occurs or if they work through issues.. will have lots of time to buy don't need to bottom tick. Sell now buy once fixed or credit overhang goes.

 

 

Who knows though.  Maybe they did kitchen sink with new managemebt coming in and things will get better from here. Don't really feel strongly one way or another. But think dismissing the bears who have been very very right for the last few quarters - on both trajectory of business and stock price - is a mistake.

Thanks for the pushback, it's highly appreciated. Just noticed they changed the wording in the most recent 10-Q regarding allowance for loan losses. Doesn't square with how they've downplayed things on the conference calls. Will probably take a big hit to equity (as the bears have said all along). These guys suck. :)

 

"While the Company is currently unable to reasonably estimate the impact of the new adoption, the Company expects the adoption of the standard on to significantly increase its consolidated financial statements allowance for loan loss. Any adjustments to the change in the allowance for loan loss at adoption would be recorded through a cumulative-effect adjustment to retained earnings."

[undervalued]

Memcham reduced his position in his latest filing.

[decko]

True..  However, He raised his stake 25% from march to june, which could have been as low as 137 mid june.    He could have sold out this last quarter in july at 157$.  who knows.  But, Im wondering if he has recently acquired more when its $100 - $110 this quarter..  Sometimes when you make a mistake you have to trade your a$% out of the mistake.

[Guest roark33]

Every time someone mentions X investor and their position, you should increase your spidey-sense by A LOT.  Do your own work.  It's this sort of outsourced thinking that gets you into bad positions and contorts your thinking. 

[glorysk87]

Thanks for the pushback, it's highly appreciated. Just noticed they changed the wording in the most recent 10-Q regarding allowance for loan losses. Doesn't square with how they've downplayed things on the conference calls. Will probably take a big hit to equity (as the bears have said all along). These guys suck. :)

 

"While the Company is currently unable to reasonably estimate the impact of the new adoption, the Company expects the adoption of the standard on to significantly increase its consolidated financial statements allowance for loan loss. Any adjustments to the change in the allowance for loan loss at adoption would be recorded through a cumulative-effect adjustment to retained earnings."

 

FWIW I spoke with IR shortly after the quarter and she definitively said that their estimate for CECL impact WAS included in their guidance. Whether you believe that or not is up to you.

 

Other assumptions that went into the guidance were as follows:

1) Originally built in 2 rate increases, instead got rate decreases - $40mm reduction

2) Mark to market on held to sale - $50mm reduction

3) $500mm lower A/R than expected - $40mm reduction

 

This has been my 2nd biggest losing position in my time investing, and I'm still mulling over whether to sell it and take the short-term loss or whether to hang tight as it seems that A/R is finally inflecting upwards.

[Spekulatius]

Thanks for the pushback, it's highly appreciated. Just noticed they changed the wording in the most recent 10-Q regarding allowance for loan losses. Doesn't square with how they've downplayed things on the conference calls. Will probably take a big hit to equity (as the bears have said all along). These guys suck. :)

 

"While the Company is currently unable to reasonably estimate the impact of the new adoption, the Company expects the adoption of the standard on to significantly increase its consolidated financial statements allowance for loan loss. Any adjustments to the change in the allowance for loan loss at adoption would be recorded through a cumulative-effect adjustment to retained earnings."

 

FWIW I spoke with IR shortly after the quarter and she definitively said that their estimate for CECL impact WAS included in their guidance. Whether you believe that or not is up to you.

 

Other assumptions that went into the guidance were as follows:

1) Originally built in 2 rate increases, instead got rate decreases - $40mm reduction

2) Mark to market on held to sale - $50mm reduction

3) $500mm lower A/R than expected - $40mm reduction

 

This has been my 2nd biggest losing position in my time investing, and I'm still mulling over whether to sell it and take the short-term loss or whether to hang tight as it seems that A/R is finally inflecting upwards.

 

Why wouldn’t you sell it, take the short term loss and rebuy it 31 days later? You could buy a similar stock I stead, if you believe the sector takes of. Unless you believe there is an immediate catalyst, taking a short term loss seems to be a good idea. At least that’s what I would be doing.

[abitofvalue]

Can someone help me square the math on their October DQ rate...  I am getting much higher numbers (6.5%) than their reported DQ rate of 5.9%. 

 

https://www.sec.gov/Archives/edgar/data/1101215/000110121519000229/exhibit_99-1.htm

 

Assuming there is no reporting or calc error, which cant be ruled out with them, is there some weird active receivable adjustment i am missing..  6.5 vs 5.9% is a world of a difference.

 

 

[Peregrine]

Can someone help me square the math on their October DQ rate...  I am getting much higher numbers (6.5%) than their reported DQ rate of 5.9%. 

 

https://www.sec.gov/Archives/edgar/data/1101215/000110121519000229/exhibit_99-1.htm

 

Assuming there is no reporting or calc error, which cant be ruled out with them, is there some weird active receivable adjustment i am missing..  6.5 vs 5.9% is a world of a difference.

 

They sent out a revised update because of a typo: delinquent receivables were actually 1,012,305 and not 1,102,305.

[kab60]

Thanks for the pushback, it's highly appreciated. Just noticed they changed the wording in the most recent 10-Q regarding allowance for loan losses. Doesn't square with how they've downplayed things on the conference calls. Will probably take a big hit to equity (as the bears have said all along). These guys suck. :)

 

"While the Company is currently unable to reasonably estimate the impact of the new adoption, the Company expects the adoption of the standard on to significantly increase its consolidated financial statements allowance for loan loss. Any adjustments to the change in the allowance for loan loss at adoption would be recorded through a cumulative-effect adjustment to retained earnings."

 

FWIW I spoke with IR shortly after the quarter and she definitively said that their estimate for CECL impact WAS included in their guidance. Whether you believe that or not is up to you.

 

Other assumptions that went into the guidance were as follows:

1) Originally built in 2 rate increases, instead got rate decreases - $40mm reduction

2) Mark to market on held to sale - $50mm reduction

3) $500mm lower A/R than expected - $40mm reduction

 

This has been my 2nd biggest losing position in my time investing, and I'm still mulling over whether to sell it and take the short-term loss or whether to hang tight as it seems that A/R is finally inflecting upwards.

Thanks for the details, not sure what to believe with these guys.

 

Isn't it strange that they're able to give guidance on 2020 (including CECL) when they can't come up with a number in the recent 10Q? Their guidance range isn't very wide, so they must have narrowed it down, but I suppose it's possible they didn't have en exact number when they released results (shit, am I giving them the benefit of doubt again?).

 

Not sure how much significant is, but their allowance for loan losses is around 1b, so significant should be a meaningful hit I'd venture. I like the business, I like the valuation, but I hate that I don't know whether or not management is to be trusted. I'm holding, but it's my biggest loser ever - by far.

[Peregrine]

Thanks for the pushback, it's highly appreciated. Just noticed they changed the wording in the most recent 10-Q regarding allowance for loan losses. Doesn't square with how they've downplayed things on the conference calls. Will probably take a big hit to equity (as the bears have said all along). These guys suck. :)

 

"While the Company is currently unable to reasonably estimate the impact of the new adoption, the Company expects the adoption of the standard on to significantly increase its consolidated financial statements allowance for loan loss. Any adjustments to the change in the allowance for loan loss at adoption would be recorded through a cumulative-effect adjustment to retained earnings."

 

FWIW I spoke with IR shortly after the quarter and she definitively said that their estimate for CECL impact WAS included in their guidance. Whether you believe that or not is up to you.

 

Other assumptions that went into the guidance were as follows:

1) Originally built in 2 rate increases, instead got rate decreases - $40mm reduction

2) Mark to market on held to sale - $50mm reduction

3) $500mm lower A/R than expected - $40mm reduction

 

This has been my 2nd biggest losing position in my time investing, and I'm still mulling over whether to sell it and take the short-term loss or whether to hang tight as it seems that A/R is finally inflecting upwards.

Thanks for the details, not sure what to believe with these guys.

 

Isn't it strange that they're able to give guidance on 2020 (including CECL) when they can't come up with a number in the recent 10Q? Their guidance range isn't very wide, so they must have narrowed it down, but I suppose it's possible they didn't have en exact number when they released results (shit, am I giving them the benefit of doubt again?).

 

Not sure how much significant is, but their allowance for loan losses is around 1b, so significant should be a meaningful hit I'd venture. I like the business, I like the valuation, but I hate that I don't know whether or not management is to be trusted. I'm holding, but it's my biggest loser ever - by far.

 

To be fair, CECL doesn't matter that much...it doesn't affect real losses and it won't constrain capital. ADS's problem is the decline of their traditional customer base + the decline in relative usage of private label cards vs general purpose and co-brand cards. Still, the price of the stock is so low that it's pricing in perpetual decline.

[abitofvalue]

Can someone help me square the math on their October DQ rate...  I am getting much higher numbers (6.5%) than their reported DQ rate of 5.9%. 

 

https://www.sec.gov/Archives/edgar/data/1101215/000110121519000229/exhibit_99-1.htm

 

Assuming there is no reporting or calc error, which cant be ruled out with them, is there some weird active receivable adjustment i am missing..  6.5 vs 5.9% is a world of a difference.

 

They sent out a revised update because of a typo: delinquent receivables were actually 1,012,305 and not 1,102,305.

 

thanks.. what a clown show.

[NotSoWise]

Alliance Data has new CEO... check the press release.

 

The new guy looks good on paper. But when he comes in Feb'20 he will make new reserves for sure.

[maybe4less]

Alliance Data has new CEO... check the press release.

 

The new guy looks good on paper. But when he comes in Feb'20 he will make new reserves for sure.

 

They also affirmed guidance in that press release. Does that imply that they had already incorporated the recent Fed cut into their guidance?

[kab60]

That was somewhat of a surprise - but a pleasant one. Surprised he is committing to 2020 guidance. Yaaah. Anyway, he's 58 years old. I don't think this stays independent for too long.

[NotSoWise]

For me it looks like a restructuring situation. Melissa was in Ed's team, so not interested about taking out all the mess, as it was partially her mess. Once the new guy comes in he may take out a few dead bodies from the closet, make new reserves for portfolios and replace some people below him, potentially CFO. It will take some time to fix on a challenging market.

 

Wasn't the guidance about 2019 only?

 

But overall its a positive change (base effect I guess), but not without its risks.

[maybe4less]

For me it looks like a restructuring situation. Melissa was in Ed's team, so not interested about taking out all the mess, as it was partially her mess. Once the new guy comes in he may take out a few dead bodies from the closet, make new reserves for portfolios and replace some people below him, potentially CFO. It will take some time to fix on a challenging market.

 

Wasn't the guidance about 2019 only?

 

But overall its a positive change (base effect I guess), but not without its risks.

 

Yeah, I'm out for now.

 

Best Case: we have no real CEO and no real story for six months until after Q1 earnings. Then Andretta comes in and writes stuff down, a bunch of one-time charges, resets long-term guidance, etc.

 

Worst Case: No one noticed how bad Miller was until she was in charge and there are serious problems with the card business she ran for such a lone time.

 

[kab60]

For me it looks like a restructuring situation. Melissa was in Ed's team, so not interested about taking out all the mess, as it was partially her mess. Once the new guy comes in he may take out a few dead bodies from the closet, make new reserves for portfolios and replace some people below him, potentially CFO. It will take some time to fix on a challenging market.

 

Wasn't the guidance about 2019 only?

 

But overall its a positive change (base effect I guess), but not without its risks.

Guidance included 2020 as well. But communication isn't a strong skill of theirs, so who knows?

[LC]

Ralph is a good guy, I would not be worried with him at the helm. I picked up some shares in support.

[NotSoWise]

Do you know him personally - or is it based on his CV?

[LC]

I've worked with him professionally for a number of years for certain consumer modelling related items.

 

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.

[Spekulatius]

I've worked with him professionally for a number of years for certain consumer modelling related items.

 

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.

 

Pretty interesting insight and I think in this case, a new CEO can make quite a bit of difference. The former CEO Melissa Mayer came from the marketing and seemed to lack the skill to really run the business with predicable results. I do think we might see major reset (these marketing folks always see the world with rose colored glasses) but once that is done, we could look at an interesting situation here.

[NotSoWise]

Thanks for feedback on the new CEO.

Agree, worth observing the situation how it develops and waiting for the first quarterly call with him to get more insights. For the time being its a black box out of which anything can come out (both good and bad) in the next few months.

[Spekulatius]

Podcast episode from scuttleblurb discussing ADS:

https://podcasts.apple.com/us/podcast/scuttleblurb/id1443244539?i=1000459218424

[ander]

Anyone following this name with the new CEO having joined?