ADS - Alliance Data Systems

[flesh]

Just above your quote from ec

 

"Ed Heffernan

 

Yes. Now, it’s a good question. We’ve looked at obviously, a lot of this stuff. Fortunately, several years ago, because the retail vertical is so large for us, you’ve heard me talk about building up this mini-Epsilon within cards or sort of 500 of data scientists and analytics and marketing specialists. So from a perspective of what’s already in place within cards, that’s already there. 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."

 

 

I don't know how much overlap there is at this point. Whatever over lap there is they will likely have some medium term contract in place.

 

Personally, I'll take the reduced risk from the extra cash even to the small detriment of the company. If we were mid cycle I may feel differently.

 

OTOH, if the price is high enough, it's a no brainer.

[Foreign Tuffett]

Just above your quote from ec

 

"Ed Heffernan

 

Yes. Now, it’s a good question. We’ve looked at obviously, a lot of this stuff. Fortunately, several years ago, because the retail vertical is so large for us, you’ve heard me talk about building up this mini-Epsilon within cards or sort of 500 of data scientists and analytics and marketing specialists. So from a perspective of what’s already in place within cards, that’s already there. 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."

 

 

I don't know how much overlap there is at this point. Whatever over lap there is they will likely have some medium term contract in place.

 

Personally, I'll take the reduced risk from the extra cash even to the small detriment of the company. If we were mid cycle I may feel differently.

 

OTOH, if the price is high enough, it's a no brainer.

 

Clearly there's still overlap, but you're right that it isn't immediately clear the degree to which Card Services still relies on Epsilon. While I literally just started researching ADS last night, I'm skeptical that Card Services has replicated the capabilities of Epsilon. Will they be able to sufficiently replicate the capabilities by the time Epsilon is sold? Maybe.

 

Epsilon is out in the marketplace competing for outside clients. This, at least in theory, means that it has to be efficient and capable. I like the dynamic of it being able to use its expertise, honed in the competitive marketplace, to benefit Card Services. My first impression when I started researching the company is that this dynamic is what sustains ADS' competitive moat.

 

I agree with you that a rich bid for Epsilon would, at least somewhat, mitigate this entire issue.

[LowIQinvestor]

Epsilon could fetch a higher multiple than Acxiom

I have a range of $5B- $6.5B for Epsilon alone

 

Some big customers wins lately too:

Dunkin' Further Integrates With Alliance Data's Epsilon To Modernize Customer Experience

https://www.prnewswire.com/news-releases/dunkin-further-integrates-with-alliance-datas-epsilon-to-modernize-customer-experience-300746292.html

[mwtorock]

Epsilon could fetch a higher multiple than Acxiom

I have a range of $5B- $6.5B for Epsilon alone

 

Some big customers wins lately too:

Dunkin' Further Integrates With Alliance Data's Epsilon To Modernize Customer Experience

https://www.prnewswire.com/news-releases/dunkin-further-integrates-with-alliance-datas-epsilon-to-modernize-customer-experience-300746292.html

 

From transaction multiples, 5B+ makes total sense for Epsilon. Who you think would have the appetite at the moment though? The agencies? PE firms? Wouldn't a spin off be better than a sale for shareholders?

[LowIQinvestor]

Couple items:

 

 

Alliance Data to Offer Credit Card Services to Penn National

https://www.prnewswire.com/news-releases/alliance-data-to-launch-co-brand-credit-card-loyalty-program-for-penn-national-gaming-north-americas-largest-regional-gaming-operator-300757390.html

 

Alliance Data to Participate at the Goldman Sachs U.S. Financial Services Conference 2018

https://www.prnewswire.com/news-releases/alliance-data-to-participate-at-the-goldman-sachs-us-financial-services-conference-2018-300758164.html

 

 

[LowIQinvestor]

Wow, very surprised that ADS is down on today's conference at Goldman.

 

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

 

This stock is insanely mis-priced!

[Gregmal]

Wow, very surprised that ADS is down on today's conference at Goldman.

 

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

 

This stock is insanely mis-priced!

 

I agree. The market has gotten filled with stupid participants. By stupid I mean day traders, high frequency, algo's, etf's, etc. Participants void of a fundamental perspective and as such there is a lot of value available. All bodes well for the patient investor with the ability to hold for more than a few weeks/months.

[glorysk87]

Wow, very surprised that ADS is down on today's conference at Goldman.

 

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

 

This stock is insanely mis-priced!

 

That's not what they said.

[vince]

Wow, very surprised that ADS is down on today's conference at Goldman.

 

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

 

This stock is insanely mis-priced!

 

That's not what they said.

 

Close, but he's right, they didn't really say that.  But what he said was encouraging (even though you should take their communications lightly)

[LowIQinvestor]

Wow, very surprised that ADS is down on today's conference at Goldman.

 

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

 

This stock is insanely mis-priced!

 

That's not what they said.

 

What did he say then? Do you have a transcript?

[cubsfan]

Wow, very surprised that ADS is down on today's conference at Goldman.

 

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

 

This stock is insanely mis-priced!

 

That's not what they said.

 

What did he say then? Do you have a transcript?

 

There is a replay available on website. He said after selling Epsilon, they would do what they did in 2009, which was buy back

a lot of stock, when they took out 1/3 of their stock. The intention is there , and likely the capacity might be there. Will it be 1/3? 

Not specific. More like "for example".

[kab60]

Wow, very surprised that ADS is down on today's conference at Goldman.

 

Mgmt said they are going to buy back a third of the stock ( float) once they sell Epsilon!!

 

This stock is insanely mis-priced!

 

That's not what they said.

 

What did he say then? Do you have a transcript?

 

There is a replay available on website. He said after selling Epsilon, they would do what they did in 2009, which was buy back

a lot of stock, when they took out 1/3 of their stock. The intention is there , and likely the capacity might be there. Will it be 1/3? 

Not specific. More like "for example".

This. There's a transcript available via Interactive Brokers from Reuters I believe. Lots of good stuff in there.

[Rasputin]

I'm checking to see if my math is right:

 

Current share price $189

Shares outstanding 55 million shares

Current market cap $10.4 Billion

Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.

He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

 

Post Epsilon:

Shares outstanding post 30% buyback 38.6 million shares

CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

 

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

 

Is this post Epsilon sale fcf/sh roughly right?

 

Thanks!

[flesh]

I think about it a bit differently, more like, what does it looks like in cy 19/20/21, for example they already have 3.6b cash.

 

I'm not looking at the numbers now but direction-ally, you'd need to add the interest expense saved on 1.9b. Plus loyalty is under earning, plus if you're looking at cy 19' you could add 15%ish to Card's fcf.

[valuedontlie]

I'm checking to see if my math is right:

 

Current share price $189

Shares outstanding 55 million shares

Current market cap $10.4 Billion

Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.

He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

 

Post Epsilon:

Shares outstanding post 30% buyback 38.6 million shares

CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

 

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

 

Is this post Epsilon sale fcf/sh roughly right?

 

Thanks!

 

YTD cash from operations was $2bn and capex at $150m... I'm not sure Epsilon + leakage would account for the delta you are implying (i.e. $680m in FCF)...

[Rasputin]

Well for financial services company, same like banks, can't really look at cash flow statement.  The cash flow statement adds back provision for loan loss, and include financial transactions like securitization among other things. 

 

I use fcf because management seems to equate fcf to eps.  FCF is kinda funny term for a credit card company, but I think he equates fcf = ebitda post funding costs - capex - taxes-capital required to grow the portfolio.

 

I am basically trying to get post Epsilon eps using 2018 business condition.  I understand CEO said he can grow card by 15% per year, but sometimes he refers to "ACTIVES" when talking about the 15% growth and not the whole portfolio, plus this band-aid ripping may result in decline in avg balance.  i'm not sure we can extrapolate $17.5 B by 15% for 2019 and another 15% for 2020.  It could be a decline to a new base from $17.5 B then grow 15% from there?

 

My first thought right now is I prefer they don't sell Epsilon because the cash flow from Epsilon will help them survive a severe downturn.   

 

I'm not sure that cash on the balance sheet can be used, it might be there for liquidity coverage requirement?  They have talked about deleveraging through out this year, seem like they would have use that cash to deleverage if it can be used to pay down debt.  Kinda like BAC with its $540 Billion in liquidity.  During the Q3 conference call, they talk about leverage ratio of 2.4 so $5.8 B of debt divided by $2.4 B of ebitda so I don't think they count the cash on the balance sheet against their debt.  They want to lower this 2.4 leverage ratio to 2.2 by year end. 

[valuedontlie]

Agreed... so TTM "FCF" defined as CFO less capex = ~$2.6bn... provision + capital for growth another $600m as you say gets you near $2bn for all 3 businesses today... also need to consider things like deposits when thinking of funding receivable growth... hard to know what true cash generation is in such a business mix...

[no_free_lunch]

Can I ask a potentially very stupid question?

 

Given that this is a financial company, is it not an issue that they have negative tangible book value?  I am okay to overlook that when they company has a solid product and earnings stream (apple, microsoft, danaher) but in this case how do you justify ignoring that metric?

[vince]

I'm checking to see if my math is right:

 

Current share price $189

Shares outstanding 55 million shares

Current market cap $10.4 Billion

Let's say they sell Epsilon for $5 Billion.  CEO said he would use $1.9 Billion to pay down debt, that will bring down long term debt to roughly $4 Billion.

He then said the remainder will be used to buyback stock, so $3.1 Billion would reduce share count by about 30% (for simplicity let's assume today stock market price as avg cost/sh)

 

Post Epsilon:

Shares outstanding post 30% buyback 38.6 million shares

CEO said the card business generates $1 Billion in cash flow (i'm assuming this is earnings after interest and taxes but before d&a) with 6% provision rate, and it needs $400 million to grow card portfolio by 15% so free cash flow = $600 million.  Card services portfolio is roughly $17.5 Billion.  Technically, at steady state (no growth), they can break even with 11% ish net charge-offs rate. 

 

LoyaltyOne free cash flow (after tax (ebitda-capex)) is roughly $140 million.  Corporate costs pre-tax is roughly $150 million.  Let's say they cut it in half post Epsilon, so $75 million corporate costs pre-tax or $60 million post tax (20% tax rate)

 

$680 million ($600 million card + $80 million LoyaltyOne-corporate costs) in fcf divided by 38.6 million shares = $17.6 per share in fcf. 

 

Is this post Epsilon sale fcf/sh roughly right?

 

Thanks!

 

Ras, that is approximately right, fcf multiple goes up a bit but ev/ebitda multiple goes down a bit because they are deleveraging.  Valdontlie 2.6 number is not accurate I dont believe, ebitda pre sale is 2.2-2.3 I think

[vince]

From the call...Sure. From a leverage perspective, we have some debt out there. There's about $1.9 billion of notes that I'd like to take care of, and that would put our leverage ratio below 2, which I think is certainly very solid. Anything above that, which hopefully will be quite a bit, we will not need to use that to fund any of the card business. Even with growing 15% a year, the card business will throw off $600 million or $700 million of free cash. So even after paying for the capital for that growth, you've got a pretty decent cash machine, which is the payments and cards business. And so if you have a few billion left over, we're going to run the same play that we ran during the Great Recession. The stock was beat up pretty good. And in the middle of the Great Recession, we went out and took out 1/3 of the company. And so I think that's a game plan that we know how to do. That's a game plan that I get excited about. And given sort of the lack of love that's been out there, it's something that would certainly be high on the priority list for us.

 

So looks like Ras's numbers (and mine) are a little low for fcf...he says 6-700 for cards business but doesnt include Loyalty One

[steph]

My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying.  They told the CEO they were happy at the actual level and would not sell more.

The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019.  From then on +15% and 2020 +20%.  So, what should have happened in the second half of 2018 is delayed by one year.  It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients.  Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price.

So, all in all a very nice cash machine at a very nice price.  But business has evolved and they have to adapt.   

[vince]

My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying.  They told the CEO they were happy at the actual level and would not sell more.

The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019.  From then on +15% and 2020 +20%.  So, what should have happened in the second half of 2018 is delayed by one year.  It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients.  Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price.

So, all in all a very nice cash machine at a very nice price.  But business has evolved and they have to adapt. 

 

It is my opinion that the stock continues to sell off cause we are going on 3 years of mgmt continuing to get shareholders hopes up of better business performance and then falling short.  A couple times it was because they didn't communicate properly and other times they were just dead wrong.  I have witnessed something similar with Mike Fries at Liberty Global, the market does not like it when your optimism is unwarranted and when guidance is wrong.  This time I think it is Valueact forcing them to steer the ship into short term pain and long term gain .  It was only 1 quarter ago that mgmt started talking about pro actively shedding some clients, which I think is very rare and the right thing to do.  But it comes after 2.5 years of shareholders being disappointed.....its just a bad time to take on self inflicted shortfalls but something I think is entirely appropriate.  I can just imagine what the board meetings looked like in the last year......." Jesus Christ Mason, the shareholders are gonna have our freaking heads if we purposely lower our customer base and earnings, we've had subpar performance for 2 years and my bullshitting is working anymore".  "I dont give a damn Edward, you should have just told them the truth all along rather than bullshit them, this way when inevitable short term bad news arrives the shareholders will be understanding"!!

[Spekulatius]

If it’s just a communication issue, ADS would be a great bargain. I am very sceptical of 15% growth predictions in credit card accounts late in the cycle. Leverage is already pretty high (tangible book is negative as another poster pointed out) and Epsilon has been struggling for a while since 2014 and now it’s top line is shrinking. Is this a melting icecube? 9x EBITDA might be achievable, but a good partner the proceeds will have to go towards debt reduction, IMO. The sale of Epsilon will recur their capacity to carry debt quite a bit.

 

I don’t see a Slam dunk stock here, but I agree, if you believe the management project on adjusted earnings and growth, this is very cheap here.

[WneverLOSE]

https://www.bloomberg.com/news/articles/2018-12-06/retailers-embrace-payment-apps-to-sidestep-90-billion-in-swipe-fees

 

two of the companies highlighted in the article :

 

https://www.bimnetworks.com/ - tries to do the same as ADS card services without giving credit to customers but by using ACH instead.

 

https://www.thelevelup.com - uses negotiation power with the networks and focusing on restaurants to provide mobile payments and customer loyalty. (part of Grubhub).

[abitofvalue]

Haven't their buybacks and acquisitions impacted tangible book value? Not sure it's the right metric for ADS.

 

$5B for epsilon? Would be nice but is it realistic? I think the market would react very very positively to any number above $3.5B. The challenge is epsilon has been challenged for sometime and buyer knows ADS needs to sell. Also the buyer will likely have to sign a TSA or other long-term contract with card services likely limiting true profitability of epsilon.

 

Don't understand why they differentiating between active accounts and voluntary cancellations. At the end of the day - revenue depends on total receivables. If you signed shitty retailers that you are now culling, you don't get to pretend they don't exist and growth is actually higher.. the revenue is the the revenue. This massaging of numbers does not help management credibility - which is already low given constant promises of turnarounds and credit mishaps.

 

Still think their announcement on Q3 call of upcoming strategic announcements was fool hardy given they hadn't even started the sale process.  All it did was raise expectations and further cemented market view that this is a very promitional managemt team that can't be trusted.. bSeems like they were trying to open a window for insider sales by releasing all information they had.