ADS - Alliance Data Systems

[vince]

Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

[KCLarkin]

Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

 

I'm not too comfortable with financials, so WAIR, SYF, and KKR wouldn't interest me unless I had some special insight. BAM, AN, ALSN, KMX, ST are stocks that I know. I own BAM. Have looked at the others several times but never pulled the trigger. I've looked at GM but if I wanted an auto I'd probably repurchase FCAU or RACE since I know them better. I already own an airline - it's been unpleasant. Not really comfortable with any of the cable/telco companies.

 

So you are right, there are many opportunities that pop-up. But all of the ones you listed have some hair on them. They are in cyclical businesses or have complex structures or have lot's of debt or face potential disruption. They are cheap but there are reasons why they are cheap. I own CVS in this category of cheap but hairy. I'm not finding many that I consider no-brainers that meet my 15% hurdle.

[vince]

Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

 

I'm not too comfortable with financials, so WAIR, SYF, and KKR wouldn't interest me unless I had some special insight. BAM, AN, ALSN, KMX, ST are stocks that I know. I own BAM. Have looked at the others several times but never pulled the trigger. I've looked at GM but if I wanted an auto I'd probably repurchase FCAU or RACE since I know them better. I already own an airline - it's been unpleasant. Not really comfortable with any of the cable/telco companies.

 

So you are right, there are many opportunities that pop-up. But all of the ones you listed have some hair on them. They are in cyclical businesses or have complex structures or have lot's of debt or face potential disruption. They are cheap but there are reasons why they are cheap. I own CVS in this category of cheap but hairy. I'm not finding many that I consider no-brainers that meet my 15% hurdle.

 

I admire the discipline and patience, I know how hard those characteristics are to embrace.  Not that it makes a difference based on the rest of your post but wair is a distributor of airline components.  Please take another look at cable, for me Chtr fits the 15% hurdle more than anything else, taking into account risk and timing.  The demand for the network asset  services, the monopoly characteristics, the moat, pricing power of Chtr (they price their bundle 25% less than peers which is extremely hard to do when you know you can price aggressively), Rutledge as operator, Malone as allocator and finally the price.  Reasonable people can disagree about how successful they will be from these levels but there is lots of margin of safety and lots of levers if the future turns out harder.  Read a few of my posts on Charter's board if you change your mind.

[maybe4less]

Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

 

I'm not too comfortable with financials, so WAIR, SYF, and KKR wouldn't interest me unless I had some special insight. BAM, AN, ALSN, KMX, ST are stocks that I know. I own BAM. Have looked at the others several times but never pulled the trigger. I've looked at GM but if I wanted an auto I'd probably repurchase FCAU or RACE since I know them better. I already own an airline - it's been unpleasant. Not really comfortable with any of the cable/telco companies.

 

So you are right, there are many opportunities that pop-up. But all of the ones you listed have some hair on them. They are in cyclical businesses or have complex structures or have lot's of debt or face potential disruption. They are cheap but there are reasons why they are cheap. I own CVS in this category of cheap but hairy. I'm not finding many that I consider no-brainers that meet my 15% hurdle.

 

I admire the discipline and patience, I know how hard those characteristics are to embrace.  Not that it makes a difference based on the rest of your post but wair is a distributor of airline components.  Please take another look at cable, for me Chtr fits the 15% hurdle more than anything else, taking into account risk and timing.  The demand for the network asset  services, the monopoly characteristics, the moat, pricing power of Chtr (they price their bundle 25% less than peers which is extremely hard to do when you know you can price aggressively), Rutledge as operator, Malone as allocator and finally the price.  Reasonable people can disagree about how successful they will be from these levels but there is lots of margin of safety and lots of levers if the future turns out harder.  Read a few of my posts on Charter's board if you change your mind.

 

Agree with Vince here on cable. KCLarkin - not sure what gives you pause on cable cos. My guess is potential disruption. IMO, the disruption is more likely to be in the other direction than most people think, i.e., cable companies disrupting mobile operators. Verizon probably buys Charter in the next 5 years as this becomes more clear and the mobile guys need more high capacity fixed infrastructure to compete.

[vince]

Take a look at Syf, Kkr (the calculation is a little different for companies that have  liquid values on the balance sheet AND earning power similar to BRK), Bam, An, and Alsn, these have good yields and are good growing businesses.  Then you have Lbtya, Gm, Aal, Wair, Atus, where they arent my favorite way of realizing the formula but if you look at them I think you will agree.  Then you have a couple that are 13-15 times like Kmx and St that have a good chance to get there as well.  Anyway, even though you didnt ask, those are a few to chew on and let me know what you think

 

I'm not too comfortable with financials, so WAIR, SYF, and KKR wouldn't interest me unless I had some special insight. BAM, AN, ALSN, KMX, ST are stocks that I know. I own BAM. Have looked at the others several times but never pulled the trigger. I've looked at GM but if I wanted an auto I'd probably repurchase FCAU or RACE since I know them better. I already own an airline - it's been unpleasant. Not really comfortable with any of the cable/telco companies.

 

So you are right, there are many opportunities that pop-up. But all of the ones you listed have some hair on them. They are in cyclical businesses or have complex structures or have lot's of debt or face potential disruption. They are cheap but there are reasons why they are cheap. I own CVS in this category of cheap but hairy. I'm not finding many that I consider no-brainers that meet my 15% hurdle.

 

I admire the discipline and patience, I know how hard those characteristics are to embrace.  Not that it makes a difference based on the rest of your post but wair is a distributor of airline components.  Please take another look at cable, for me Chtr fits the 15% hurdle more than anything else, taking into account risk and timing.  The demand for the network asset  services, the monopoly characteristics, the moat, pricing power of Chtr (they price their bundle 25% less than peers which is extremely hard to do when you know you can price aggressively), Rutledge as operator, Malone as allocator and finally the price.  Reasonable people can disagree about how successful they will be from these levels but there is lots of margin of safety and lots of levers if the future turns out harder.  Read a few of my posts on Charter's board if you change your mind.

 

Agree with Vince here on cable. KCLarkin - not sure what gives you pause on cable cos. My guess is potential disruption. IMO, the disruption is more likely to be in the other direction than most people think, i.e., cable companies disrupting mobile operators. Verizon probably buys Charter in the next 5 years as this becomes more clear and the mobile guys need more high capacity fixed infrastructure to compete.

 

Agreed with wireless and verizon acquisition

[KCLarkin]

Agreed with wireless and verizon acquisition

 

Let's keep this thread about ADS.

[ander]

Vince: “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”

 

Vince – not at all. I’m looking to get to the best answer and different perspectives, approaches, insights, etc. always helpful.

 

 

 

KCLarkin: "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."

 

KCLarkin – I agree, I like finding those situations with a high FCF yield plus growth on those. Can make a lot of money. The reason I think of it on a DCF basis is that it forces me to often think about the out years much more. Agreed though it often gets to the same spot.

 

 

 

Vince: “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.”

 

Vince – I just meant that a multiple of FCF (or a p/e multiple) is a heuristic (or short cut) for a DCF as well. For example, if you’re willing to pay 10x FCF, that the same as a 10% discount rate. DCF of course captures the changes in FCF estimates – though I don’t mean to imply that I’m modeling out to decimal points for false precision but helps me do a reality check often times.

 

 

 

Vince: “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 – did not sound rude at all – I’m fairly thick-skinned. If your insights help me make money or avoid losing money, I’m happy! If the asset sales produce a stub at 7-8x I’ll be taking a closer look as well.

 

 

 

The main question for me on ADS going forward is whether that card services growth rate is sustainable. In terms of background, I'd invested in the company around 2011 and the stock tripled so was very happy with the outcome. I missed some of the upside when I sold in 2013, but what I liked about Ed (CEO) and Charlie (CFO) back then is that they were delivering on exactly what they said they would be doing. There was a big bear base on them back then too which had been hanging over them - ranging from credit quality to the financial engineering on the warrants they had issued. I exited because I had trouble getting substantial uspide on my future estimates. To get much more upside their TAM (total addressable market) would have to expand substantially beyond what they had guided to and had discussed for years. At the time, I had done diligence by speaking with multiple potential retailers on the card side to size the market and I felt like a lot of the easier opportunity had been addressed. What has happened since then is that they have expanded what they claim their TAM to be and some of that is fair, but their results have been underwhelming over the past few years relative to their guidance -- they may have set too aggressive of targets. My worry is that the TAM is not as large and to try to achieve earnings growth targets, they may have taken lower quality customers -- which would show up in write-offs if there is a downturn. The way they grow their card business is more retailers, more card customers (did they drop their underwriting standards), higher card balances, higher interest rates. As the numbers get larger and the retail environment is tougher, I'd want to get comfortable that the TAM is large enough to support the growth rates on an ongoing basis. Unfortunately private label does not have the wind at it's back like the general cash to card transition is benefitting the V and MA of the world. Just some thoughts. Best.

 

[LowIQinvestor]

FYI:

ADS should be making an announcement any day now about value enhancing activities.

 

 

[vince]

FYI:

ADS should be making an announcement any day now about value enhancing activities.

 

Waiting patiently, but don't know if the market will more or less yawn as they already announced that a significant restructuring is coming soon.  They may even wait until the volatility slows down....heck why don't they wait until the upcoming business slowdown so we get much lower multiple for the assets they are disposing.  Incredible some of the things I have seen very well paid mgmt's do in the last couple years

[steph]

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

 

ValueAct sold some of their shares to ADS recently

 

What do you make of this?  They are on the board and have sold at a loss compared to their last purchase price. Why are they selling to ADS? And why are they selling?

Because they held more than 10%? 

 

At todays prices I love this stock, but this makes me a bit nervous.

 

[vince]

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

 

ValueAct sold some of their shares to ADS recently

 

What do you make of this?  They are on the board and have sold at a loss compared to their last purchase price. Why are they selling to ADS? And why are they selling?

Because they held more than 10%? 

 

At todays prices I love this stock, but this makes me a bit nervous.

 

I have all the same questions as you but it doesnt make me nervous.  If they were selling large chuncks in the open market, that would make me nervous

[LowIQinvestor]

Alliance Data Exploring Strategic Alternatives For Epsilon:

 

https://investor.alliancedata.com/news-releases/news-release-details/alliance-data-exploring-strategic-alternatives-epsilonr

 

 

[BeerBBQ]

How is this announcement "aggressive" (term mgmt. used on Q3 call)?

 

And what is ADS 2.0? air miles and card services?

 

I would've thought that after a year of strategic review they would, at a minimum, be announcing an actual deal for Episilon...

[vince]

How is this announcement "aggressive" (term mgmt. used on Q3 call)?

 

And what is ADS 2.0? air miles and card services?

 

I would've thought that after a year of strategic review they would, at a minimum, be announcing an actual deal for Episilon...

 

I didnt expect a deal but did expect some more detail, what a joke.  In all fairness they did talk about 2.0 on the call and they did say that they would move quickly AFTER the announcement but before actively searching for a buyer.  But I definitely agree with you that they look like fools.....again

[kab60]

Well, it doesn't really change anything. The most important thing is it fetches a decent price. I'd expect them to divest LoyaltyOne as well later on, but these M&A processes can be quiet disruptive, so I think it's fine to do one deal at a time (and LoyaltyOne probably could use a couple of decent quarters to show it has been turned around). They better move quickly though since it has been very much a sellers market for quiet some time now.

 

[vince]

Well, it doesn't really change anything. The most important thing is it fetches a decent price. I'd expect them to divest LoyaltyOne as well later on, but these M&A processes can be quiet disruptive, so I think it's fine to do one deal at a time (and LoyaltyOne probably could use a couple of decent quarters to show it has been turned around). They better move quickly though since it has been very much a sellers market for quiet some time now.

 

I agree it doesn't change anything except maybe another hit to their credibility.  If you read the call it clearly states they will have detail as to what they were going to do with the assets whereas their release shows that they still have no clue.  The manner in which this executive team communicates with it's investors is embarrassing.  And every quarter they apologize for another miscommunication and then do it all over again.  I sold 25% of my position today......another hit to their credibility

[LowIQinvestor]

Looks like everyone has given up on ADS today & mgmt.

( what have you done for me lately!)

 

some perspective might be warranted:

This is the same mgmt ( CEO) who helped drive the stock from $50/ share in 2009 to $200 / share in 2018. Not too shabby.

 

Short term I think traders wanted a sale & stock pop before 2019. So they are all moving on today.

 

Will be interesting to see if Arlington Value keeps on buying ADS in Q4.

 

[vince]

Looks like everyone has given up on ADS today & mgmt.

( what have you done for me lately!)

 

some perspective might be warranted:

This is the same mgmt ( CEO) who helped drive the stock from $50/ share in 2009 to $200 / share in 2018. Not too shabby.

 

Short term I think traders wanted a sale & stock pop before 2019. So they are all moving on today.

 

Will be interesting to see if Arlington Value keeps on buying ADS in Q4.

 

I dont disagree with your premise but measuring their stock price performance from the 2009 crisis might not be the most accurate guage.  And I didnt comment negatively on their performance managing the business, I wouldnt own a large position in it if I didnt think they could realize the potential but they admittedly do a terrible job managing their communications with investors.  Nor do I care for a stock pop, I just want them to take their communications with investors more seriously.  And looks like the market completely agrees....on a day where arguably the stock should have reacted positively, its down pretty significantly

[LowIQinvestor]

Today's price is a gift.

Short term expectations were not met but doesn't change the long term fundamentals of this biz.

30% ROE trading at under 10 PE (e)

We are large buyers of ADS today.

[kab60]

Well, it doesn't really change anything. The most important thing is it fetches a decent price. I'd expect them to divest LoyaltyOne as well later on, but these M&A processes can be quiet disruptive, so I think it's fine to do one deal at a time (and LoyaltyOne probably could use a couple of decent quarters to show it has been turned around). They better move quickly though since it has been very much a sellers market for quiet some time now.

 

I agree it doesn't change anything except maybe another hit to their credibility.  If you read the call it clearly states they will have detail as to what they were going to do with the assets whereas their release shows that they still have no clue.  The manner in which this executive team communicates with it's investors is embarrassing.  And every quarter they apologize for another miscommunication and then do it all over again.  I sold 25% of my position today......another hit to their credibility

This is the first time they state they're pursuing a sale of the whole of Epsilon. I read a recent Jefferies report (from post Q2 I believe) where they speculated they might only get rid of the agency biz. Pretty clear from the reaction today that most feel the same as you (and boy would a quick sale at a double digit multiple feel good), but I'm not too surprised by the announcement today. With ValueAct involved and management having skin in the game I'm pretty comfortable they're trying to maximize value. That said, I agree their communication could be better, but I think that mainly adds a bit of uncertainty, and I feel we're getting nicely compensated here.

[steph]

I never believed that they would talk about 'big' news in a couple of weeks if they really were already busy selling Epsilon.  Those things you don't preannounce some weeks in advance.

I would certainly have thought that they would give some more information on their thinking about each division and the ambitions they have. 

But coming out and for the first time confirming that they are looking for a buyer for Epsilon is good news. 

If they hadn't talked about big news coming out , this would in fact be big news.

 

[kab60]

I never believed that they would talk about 'big' news in a couple of weeks if they really were already busy selling Epsilon.  Those things you don't preannounce some weeks in advance.

I would certainly have thought that they would give some more information on their thinking about each division and the ambitions they have. 

But coming out and for the first time confirming that they are looking for a buyer for Epsilon is goo5d news. 

If they hadn't talked about big news coming out , this would in fact be big news.

Agreed it would be very strange if they had preannounced a sale. Which is why I'm also fine they're only adressing Epsilon now. I think it's pretty obvious Loyalty One should be flipped when the metrics look right, but saying these things publicly creates uncertainty internally, and that often leads to some of the best employees leaving.

[flesh]

AFAIK, the specifics of their intentions in the announcement isn't important because I simply can't know what they intended. Many ways to think about it.

 

Added at 191 today. Huge position, perfectly willing to sell some with a bump to reduce to large position, all at cap gains.

[vince]

AFAIK, the specifics of their intentions in the announcement isn't important because I simply can't know what they intended. Many ways to think about it.

 

Added at 191 today. Huge position, perfectly willing to sell some with a bump to reduce to large position, all at cap gains.

 

That is probably the best way to make money in this one even though I would like to strangle him

[Foreign Tuffett]

At first glance selling off the Epsilon division seems like a poor decision. Aren't there significant synergies between Epsilon and Card Services? Don't these synergies provide much of the company's moat?

 

 

From the last quarterly CC:

 

"From a technology perspective, regardless of where we wind up on this realignment, we will continue to have the various cousins involved in the card business."

 

"So for example, providing the technology that drives the loyalty platforms of all of our businesses, whether those assets are within the mothership or sort of outside as a cousin, it’s a pretty straightforward deal, but we will absolutely need to rely on the cousins, for example, the loyalty platform, for example, on the Conversant side, we think that’s going to be a critical new account acquisition tool for us to go out there in the marketplace and source new growth for our customers. So, there will be a number of technology items that will continue to go back and forth between the different divisions, whether some of those assets are within the company or some are out, it’s pretty straightforward in terms of what the services are."