ADS - Alliance Data Systems

[flesh]

Regarding the where debt goes Vince... there's different ways to consider it. I suggest figuring out what makes sense to you. To my mind= too cheap. Assuming the SOTP happens NTM, divestitures and all, I see 50% gain cy 19 absent economic contraction. That said, it's unlikely everything will be divested NTM, it's just a data point.

 

I don't like the ceo. Coming from a sales/marketing/psychology background, Ed's character seems to run skin deep, a fantastic facade, if he was my friend I would laugh in his face and call him out on his bullshit. OTOH, it's hard to remain circumspect with your own ego when you make 8 figures. Good news is, the incentives of those involved should dictate the chain of events plus you can lack substance and be skilled in a narrow area.

 

 

 

 

[vince]

Regarding the where debt goes Vince... there's different ways to consider it. I suggest figuring out what makes sense to you. To my mind= too cheap. Assuming the SOTP happens NTM, divestitures and all, I see 50% gain cy 19 absent economic contraction. That said, it's unlikely everything will be divested NTM, it's just a data point.

 

I don't like the ceo. Coming from a sales/marketing/psychology background, Ed's character seems to run skin deep, a fantastic facade, if he was my friend I would laugh in his face and call him out on his bullshit. OTOH, it's hard to remain circumspect with your own ego when you make 8 figures. Good news is, the incentives of those involved should dictate the chain of events plus you can lack substance and be skilled in a narrow area.

 

Flesh, thanks for the reply.  Yes, absolutely the stock is too cheap but I am trying to understand how cheap pro forma assuming a stand alone cards business.  I do think everything may be divested rather quickly as ceo said they would move quickly....I am not fond of him or his associates either but could you please elaborate on some specific reasons why you dont like him?  Would also be greatly appreciated if you stated your bull case, why is it "too cheap"?  As far as the debt goes I am just under the assumption that it would not stay with cards business and may be a reason why they started deleveraging, might be too much debt attached to the 2 subs when readying for a sale, but there is a good chance I am plain wrong.  Lastly, I like the fact that mgmt owns lots of stock, and they have behaved as such and repurchased large chuncks when it was cheap.  In addition valueact owns lots and is on the board and Glenn Greenberg owns a nice block if I remember correctly.

[LowIQinvestor]

For those trying to get a rough idea of SOTP:

 

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

 

Loyalty One:

Revs    = $ 1.3 B

EBITDA = $ 260 M

 

Epsilon:

Revs      = $2.3B

EBITDA  = $480 M

 

Card Services:

Revs      = $4.2B

EBITDA  = $1.35 B

[vince]

For those trying to get a rough idea of SOTP:

 

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

 

Loyalty One:

Revs    = $ 1.3 B

EBITDA = $ 260 M

 

Epsilon:

Revs      = $2.3B

EBITDA  = $480 M

 

Card Services:

Revs      = $4.2B

EBITDA  = $1.35 B

 

Thats kind of what i was getting at.  If you pay off all the debt the stub is worth less on a fcf multiple (duh).  If you dont its a screaming buy for levered equity guys.  Now maybe mgmt is saying that the card business is worth at least 15 times and its a decent argument but just shedding those other assets may not convince investors that think 10 times is pretty full for this model.  So I dont see where they get a huge improvement here based on those multiples and attaching all debt to the 2 assets.

[vince]

I just want to be clear that I dont care if investors think that a 10 multiple is full value, you wont need multiple expansion on the cards business to get a very good return over next 5 years.  But Im just trying to understand how mgmt can be so confident that the stub will rise dramatically.  I think it may but i wouldnt be talking the way mgmt is

[ander]

So are people playing for a $240 fair value?  20% upside doesn't seem attractive enough given the possibilities of credit turning more negative. Their adjusted EPS #'s also have a lot of adjustments.

 

I used to following this company very closely about 6 years ago, but have not followed as closely since. Their track record hasn't been as great overall since then it seems. I'd like to be a buyer here, but I want to make sure there is appropriate upside given the downside risks.

 

 

 

For those trying to get a rough idea of SOTP:

 

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

 

Loyalty One:

Revs    = $ 1.3 B

EBITDA = $ 260 M

 

Epsilon:

Revs      = $2.3B

EBITDA  = $480 M

 

Card Services:

Revs      = $4.2B

EBITDA  = $1.35 B

 

[kab60]

For those trying to get a rough idea of SOTP:

 

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

 

Loyalty One:

Revs    = $ 1.3 B

EBITDA = $ 260 M

 

Epsilon:

Revs      = $2.3B

EBITDA  = $480 M

 

Card Services:

Revs      = $4.2B

EBITDA  = $1.35 B

 

Thats kind of what i was getting at.  If you pay off all the debt the stub is worth less on a fcf multiple (duh).  If you dont its a screaming buy for levered equity guys.  Now maybe mgmt is saying that the card business is worth at least 15 times and its a decent argument but just shedding those other assets may not convince investors that think 10 times is pretty full for this model.  So I dont see where they get a huge improvement here based on those multiples and attaching all debt to the 2 assets.

They don't feel like they get full credit for those segments within ADS, and it seems synergies are very few, so I definately applaud the move. Doesn't really matter where debt ends up - they very much know the optimal capital structures I'm sure. When card services is isolated I don't think a 10xPE is the right multiple considering a plus 30 pct. ROE and double digit growth, but even if it is I think one should do okay. It seems to me they have a tremendous opportunity and have a hugely profitable niche with less competition that say SYF, but we will see.

[ander]

kab60 - curious why do you say "It seems to me they have a tremendous opportunity and have a hugely profitable niche with less competition that say SYF, but we will see."

 

I believe they take customers from one another periodically. Though I know they say they have different data, support, etc. but that's what I'd expect them to say - is it real?

[kab60]

kab60 - curious why do you say "It seems to me they have a tremendous opportunity and have a hugely profitable niche with less competition that say SYF, but we will see."

 

I believe they take customers from one another periodically. Though I know they say they have different data, support, etc. but that's what I'd expect them to say - is it real?

I'd read the last couple of writeups on VIC as well as the conference calls to get a better feel for how they differentiate themselves, but ADS are typically going after smaller clients that lack scale to take on a number of jobs inhouse. That's the story and I think the high ROE supports it.

[vince]

So are people playing for a $240 fair value?  20% upside doesn't seem attractive enough given the possibilities of credit turning more negative. Their adjusted EPS #'s also have a lot of adjustments.

 

I used to following this company very closely about 6 years ago, but have not followed as closely since. Their track record hasn't been as great overall since then it seems. I'd like to be a buyer here, but I want to make sure there is appropriate upside given the downside risks.

 

 

 

For those trying to get a rough idea of SOTP:

 

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

 

Loyalty One:

Revs    = $ 1.3 B

EBITDA = $ 260 M

 

Epsilon:

Revs      = $2.3B

EBITDA  = $480 M

 

Card Services:

Revs      = $4.2B

EBITDA  = $1.35 B

 

 

Ander, a true investor would not bank on a re rating or a quick rise in price.  He would look to his starting fcf yield and the potential growth in cash flows.  The increase in multiple, if it happens is icing on the cake.  My initial inquiry was to see how much cash the sales would bring in so I could figure out mt starting fcf equity yield for the card stub

[ander]

"Ander, a true investor would not bank on a re rating or a quick rise in price." I guess I'm not a true investor ;).

 

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?

 

 

 

So are people playing for a $240 fair value?  20% upside doesn't seem attractive enough given the possibilities of credit turning more negative. Their adjusted EPS #'s also have a lot of adjustments.

 

I used to following this company very closely about 6 years ago, but have not followed as closely since. Their track record hasn't been as great overall since then it seems. I'd like to be a buyer here, but I want to make sure there is appropriate upside given the downside risks.

 

 

 

For those trying to get a rough idea of SOTP:

 

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

 

Loyalty One:

Revs    = $ 1.3 B

EBITDA = $ 260 M

 

Epsilon:

Revs      = $2.3B

EBITDA  = $480 M

 

Card Services:

Revs      = $4.2B

EBITDA  = $1.35 B

 

 

Ander, a true investor would not bank on a re rating or a quick rise in price.  He would look to his starting fcf yield and the potential growth in cash flows.  The increase in multiple, if it happens is icing on the cake.  My initial inquiry was to see how much cash the sales would bring in so I could figure out mt starting fcf equity yield for the card stub

[flesh]

I'm perfectly happy with the SOTP posted above. Assuming it plays out that way you have a 10x pe growing double digits. Buybacks would likely be large at that multiple as well. My numbers are a bit higher on 19' NI than theirs. If we hit 240 NTM plus divi's that's fine. From there if we simply get credit for teens growth plus bb's/divi and take advantage of the up and downs in between, that's good enough for me.

 

Considering all the noise that will be diminishing NTM, I doubt the intrinsic value is being priced in. Causing some spikes here or there. Assuming their book grows as guided, I'd be very surprised not to see a 12x + post noise.

 

I love how price targets gets adjusted down after the price goes down and vice versa.

 

The psychology of the appraiser changes and he's partying when it's up and pondering when it's down.

[vince]

"Ander, a true investor would not bank on a re rating or a quick rise in price." I guess I'm not a true investor ;).

 

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?

 

 

 

So are people playing for a $240 fair value?  20% upside doesn't seem attractive enough given the possibilities of credit turning more negative. Their adjusted EPS #'s also have a lot of adjustments.

 

I used to following this company very closely about 6 years ago, but have not followed as closely since. Their track record hasn't been as great overall since then it seems. I'd like to be a buyer here, but I want to make sure there is appropriate upside given the downside risks.

 

 

 

For those trying to get a rough idea of SOTP:

 

Here are the 2017 Annuals & a bank's valuation (attached)------- ( which I believe is too conservative )

 

Loyalty One:

Revs    = $ 1.3 B

EBITDA = $ 260 M

 

Epsilon:

Revs      = $2.3B

EBITDA  = $480 M

 

Card Services:

Revs      = $4.2B

EBITDA  = $1.35 B

 

 

Ander, a true investor would not bank on a re rating or a quick rise in price.  He would look to his starting fcf yield and the potential growth in cash flows.  The increase in multiple, if it happens is icing on the cake.  My initial inquiry was to see how much cash the sales would bring in so I could figure out mt starting fcf equity yield for the card stub

 

Ander, my bad, I didn't mean to insinuate that but you asked about playing only to a 240 value and I was just trying to describe how that didnt matter to the way I understand valuation.  I will choose my words more carefully

[Rasputin]

https://www.sec.gov/Archives/edgar/data/1101215/000141881218000092/xslF345X03/primary_doc.xml

 

ValueAct sold some of their shares to ADS recently

[LowIQinvestor]

Long term I think this is worth $300 + per share. Yes seriously...

 

Too much analysis is assuming a static / status quo. I think they have much bigger ambitions than what they currently do. The business will evolve dramatically.

 

Mgmt quote from Q3 call:

 

" we expect to be a much larger payments solution outside of private label cards"

[KCLarkin]

"Ander, a true investor would not bank on a re rating or a quick rise in price." I guess I'm not a true investor ;).

 

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?

 

I would not use an analyst's valuation. They are (almost) always going to use the current stock price as their starting point and adjust their assumptions accordingly.

 

I think the other poster is saying that the investment merit doesn't depend on a re-rating.

 

Let's assume that ADS will forever trade at 10x. Will grow receivables at 10% per annum. Reinvest at 20% ROE. Payout the rest as dividends. In that scenario, you would earn 5% yield + 10% growth = 15%. This seems like a good investment even if the stock doesn't re-rate.

 

---

 

What you are saying is not wrong, it is just the inverse of what Vince is saying.

 

Intrinsic Value: Stock is trading at $200 but it is worth $300, so I will buy.

Investment: Projected returns are 15%, so I will buy.

 

Implicitly, the "investment" view is saying that 10x is not the right price. But it doesn't care what the "right" price is. And you can conveniently ignore the discount rate quagmire.

 

Personally, I always look at my projected returns from the current price. I never try to calculate the intrinsic value or do a DCF. If I think I can reasonably expect to earn 15%, then I buy. This works well for GARP investments but doesn't work as well for more traditional value investments. In this case, I think there is the opportunity for 15% underlying returns (on the stub) plus a multiple re-rating.

[vince]

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?

 

I really dont understand the first 2 sentences.  I am simply stating that when you buy something at a 10 times multiple of fcf, and assumimg its growing at least with gdp (without needing much of the 10 percent yield to grow with gdp) you will realize a great return with no re rating, assuming they dont burn any of the fcf.  Now when you find yourself in a situation like that you have a better chance of unloading at a higher multiple because historically a higher than 10 multiple is justified assuming interest rates average less than say 7-8 percent.  So u basically have the luxury of not letting the short run unpredictability of the multiple enter into and cloud your valuation.  Now as far as what I feel a proper multiple is for ADS, I think you could easily get to 15 or more with the growth rates and returns they have keeping in mind this is probably not a 20 multiple business over the longer term.  So to summarize, I dont have a specific answer for you because I don't really know except to say that I feel there is a very high probability that it is worth more than 10 times and a similar probability that it will average a higher multiple than that over next 5 years.  Now if the asset sales produce a 7-8 multiple for the stub, then I will increase my investment, all else equal, hence the initial questions surrounding the values of the 2 subs being sold.  My apologies if I sounded rude, not my intention

 

[vince]

"Ander, a true investor would not bank on a re rating or a quick rise in price." I guess I'm not a true investor ;).

 

My typical holding period is multi-year and I look at multiples as heuristics for a DCF. So if you get to higher numbers on the DCF based on your FCF yield and growth estimates it should distill to a much higher multiple in the SOTP. So forget the re-rating for now, my question is what do you think intrinsic value is? What's the upside / downside?

 

I would not use an analyst's valuation. They are (almost) always going to use the current stock price as their starting point and adjust their assumptions accordingly.

 

I think the other poster is saying that the investment merit doesn't depend on a re-rating.

 

Let's assume that ADS will forever trade at 10x. Will grow receivables at 10% per annum. Reinvest at 20% ROE. Payout the rest as dividends. In that scenario, you would earn 5% yield + 10% growth = 15%. This seems like a good investment even if the stock doesn't re-rate.

 

---

 

What you are saying is not wrong, it is just the inverse of what Vince is saying.

 

Intrinsic Value: Stock is trading at $200 but it is worth $300, so I will buy.

Investment: Projected returns are 15%, so I will buy.

 

Implicitly, the "investment" view is saying that 10x is not the right price. But it doesn't care what the "right" price is. And you can conveniently ignore the discount rate quagmire.

 

Personally, I always look at my projected returns from the current price. I never try to calculate the intrinsic value or do a DCF. If I think I can reasonably expect to earn 15%, then I buy. This works well for GARP investments but doesn't work as well for more traditional value investments. In this case, I think there is the opportunity for 15% underlying returns (on the stub) plus a multiple re-rating.

 

KC, this post is fantastic, agree strongly with everything you wrote, especially the way you describe the projected returns of 15%.  Exactly how I do valuation work and described more fully in my previous post

[vince]

KC, do you find that on average and over time that you do achieve that 15% hurdle?  And if you don't mind maybe share 5 stocks that you like best?  If thats too personal then no worries

[vince]

"Personally, I always look at my projected returns from the current price. I never try to calculate the intrinsic value or do a DCF. If I think I can reasonably expect to earn 15%, then I buy. This works well for GARP investments but doesn't work as well for more traditional value investments. In this case, I think there is the opportunity for 15% underlying returns (on the stub) plus a multiple re-rating."

 

KC, can you explain why you do not think it works as well for value investments?  The way I see it, you just have to keep ur focus on the relationship between the initial yield and any growth, even if the growth is low or even negative.  If you buy at an 8 multiple then obviously you will still do well with a low single digit growth rate.  I actually like that scenario better sometimes because now your main focus is how defensible their current position is which I think is easier than judging how they will grow, what return they will get on reinvested capital, how much capital will they reinvest and in turn what their growth rate might be.  And I think it explains perfectly when Buffett states that he is perfectly happy with no-low growth as long as the multiple is attractive.  In fact, I have heard him say many times about a current investment that he isnt confident of much unit growth but still likes the investment.  Lastly, the model that you and I have pointed out is why Munger has said that they have never really done a dcf....you dont need to, its implicit in the relationship of those 2 numbers.

[vince]

"If we turn to the next slide, which is the average card receivables and the track record. Over the past 7 years, you will see that the portfolio has grown, on average, 20% a year for the past 7 years. And to put that in perspective, if you were to look at the most common proxy used out there, that would be the revolving debt numbers. Revolving debt has moved from about $840 billion to a bit north of $1 trillion. That's about a 3% growth rate over the last 7 years. So clearly, we're growing quite a bit faster than the industry. But at the same time, our return on equity continues to be well above industry levels at 30%-plus. So it's a faster growing model and a more profitable model, and that's what we expect out of cards going forward as well."

 

Just pulled this from the third qtr call....this is partially what makes me confident of the growth rate...and remember, as long as credit quality stays reasonably good we dont need anything close to those numbers to get the 15% hurdle, and of course with a constant multiple.  What I dont undersand is why more investors dont see wht I see?

[KCLarkin]

KC, do you find that on average and over time that you do achieve that 15% hurdle?  And if you don't mind maybe share 5 stocks that you like best?  If thats too personal then no worries

 

The problem is that those opportunities tend to clump together. In the current market, they are pretty rare and you need to take on more risk. I'm lucky if I find one per year right now. And when I find them, I don't always have cash.

 

The other thing is you rarely get the smooth 15%. Assuming you are right, the market usually recognizes it and the price appreciates. Then you have the difficult decision of whether to sell or not. A recent example is IBKR. It met my hurdle when it was at $35 but then ran up to $80 where the forward returns were paltry. Do you hold or sell?

 

Or you could have a situation like ADS where the earnings are growing but the multiple is compressing.

[KCLarkin]

KC, can you explain why you do not think it works as well for value investments?  The way I see it, you just have to keep ur focus on the relationship between the initial yield and any growth, even if the growth is low or even negative.

 

Yes, it works well with any Buffett-style investment. The key thing is that the earnings need to be predictable. Yacktman describes these situations as "equity-bonds" (though I think he got the idea from Buffett).

 

Negative growth could be okay too but you need good management, otherwise there is a temptation to burn capital.

 

Glenn Greenberg also uses this concept, so I'm not surprised ADS is a very large position:

https://www.gurufocus.com/news/628326/glenn-greenberg-a-successful-hedge-fund-manager

 

--

This method doesn't really work well for cigar butts, turnarounds, distressed, or other more traditional value strategies.

 

 

[vince]

KC, can you explain why you do not think it works as well for value investments?  The way I see it, you just have to keep ur focus on the relationship between the initial yield and any growth, even if the growth is low or even negative.

 

Yes, it works well with any Buffett-style investment. The key thing is that the earnings need to be predictable. Yacktman describes these situations as "equity-bonds" (though I think he got the idea from Buffett).

 

Negative growth could be okay too but you need good management, otherwise there is a temptation to burn capital.

 

Glenn Greenberg also uses this concept, so I'm not surprised ADS is a very large position:

https://www.gurufocus.com/news/628326/glenn-greenberg-a-successful-hedge-fund-manager

 

--

This method doesn't really work well for cigar butts, turnarounds, distressed, or other more traditional value strategies.

 

I think that is the first time (greenberg article) I have seen anyone in this industry state that their hurdle is based on the sum of those 2 numbers rather than doing a DCF.  Thats why I was so surprised to see you agree with me and further elaborate on it. 

[vince]

KC, do you find that on average and over time that you do achieve that 15% hurdle?  And if you don't mind maybe share 5 stocks that you like best?  If thats too personal then no worries

 

The problem is that those opportunities tend to clump together. In the current market, they are pretty rare and you need to take on more risk. I'm lucky if I find one per year right now. And when I find them, I don't always have cash.

 

The other thing is you rarely get the smooth 15%. Assuming you are right, the market usually recognizes it and the price appreciates. Then you have the difficult decision of whether to sell or not. A recent example is IBKR. It met my hurdle when it was at $35 but then ran up to $80 where the forward returns were paltry. Do you hold or sell?

 

Or you could have a situation like ADS where the earnings are growing but the multiple is compressing.

 

I'm surprised you are having difficulty finding them, I am finding quite a few despite the higher market multiple.  And it makes sense if you think about how many well regarded professionals have underperformed over last few years, the multiples on their stocks continue to fall.  Now I cheat a bit with that formula in the sense that if the company's earning power, normalized earnings or earnings that will reach that level to make a 10 multiple are developing.  For example, Charter's cash flows are nowhere near 7-8 billion but based on their number of passings, penetration, arpu and normal ebitda per home passed, they are going to get there relatively soon.  I find that I have to go to where the puck will be in order to consistently achieve that 15-20% hurdle.  I also find that the starting yield is way more important in not making mistakes, so if I am wrong about the growth rate, results can still be very good, especially with aggressive buybacks at those 10 multiples.  Plus, with a 10 multiple and no subsequent growth you will almost certainly get some multiple expansion that will lift you towards that 15%. For those reasons I get very confident when a reasonably good business is selling for a 10 multiple or less