ADS - Alliance Data Systems

[abitofvalue]

Ya, the 5-6b they'll get for epsilon and the 3.6b in cash on the bs. Ceo already stated that 1.9 b in debt will be taken out post epsilon sale. Also, ebitda will be going up for remainco due to what I stated in the first post of this thread plus growth.

 

I think 5-6B for Epsilon is way above what the market is expecting or what their stock price reflects...  Remainco EBITDA will go up but not straight away.. maybe in 2-3 yrs but Epsilon has $450M of EBITDA and the card business is going to be flat to down in the near-term as they roll-off old programs... the new programs take tme to spool.

 

Think one other item that is underestimated by Bulls is CECL.. management gave perhaps the most bullish(it?) answer when they said they expect minimal impact. Every other card operator excepts reserves to materially increase but for some reason ADS which has higher losses than the GPCC guys is going to have no impact on reserves.. um ok sure.

[Guest Cameron]

Ya, the 5-6b they'll get for epsilon and the 3.6b in cash on the bs. Ceo already stated that 1.9 b in debt will be taken out post epsilon sale. Also, ebitda will be going up for remainco due to what I stated in the first post of this thread plus growth.

 

I think 5-6B for Epsilon is way above what the market is expecting or what their stock price reflects...  Remainco EBITDA will go up but not straight away.. maybe in 2-3 yrs but Epsilon has $450M of EBITDA and the card business is going to be flat to down in the near-term as they roll-off old programs... the new programs take tme to spool.

 

Think one other item that is underestimated by Bulls is CECL.. management gave perhaps the most bullish(it?) answer when they said they expect minimal impact. Every other card operator excepts reserves to materially increase but for some reason ADS which has higher losses than the GPCC guys is going to have no impact on reserves.. um ok sure.

 

They've shown they don't care about under-reserving.

[frommi]

 

I included the debt of the card business if that is what you wanted to ask, in fact i was lazy and just looked at the numbers from gurufocus. If they sell off epsilon for 5b and use only 2b for debt reduction debt/ebitda will stay roughly the same. Looks still very aggressive to me and since the returns from the receivables are included in ebitda i prefer to look at the whole amount of debt. In 2008 debt/ebitda was way lower.

 

Net debt is 2.2B. Up from 1.3B in 2008, but not nearly as egregious as your statement implies.

 

On Net Debt/EBITDA, leverage is slightly below 1.0x right now, compared to 2.2x in 2008.

 

Sorry if i irritated you, i am just a small guy that is learning slow. I found my mistake after looking into the old 10-K`s. They had a lot of off-balance sheet debt in 2007/2008 that didn`t show up in my data source. I include the debt from the card business because the income is also in the ebitda number. (Asset-backed securities debt – owed to securitization investors)

 

              2007:    2008:        2012:  2018:

 

%/revenue

epsilon                20.5%        27.0%    29%

Loyalty                31.5%        25.2%    17%

Credit+Private    47.3%        47.6%    54%

 

 

assets:    4162    4357        12000    29763

liabs:      2965    3962        11471    27471

equity:    1197    394          528        2291

 

ebitda:    632      655          1191      2272

 

cash:    219      157          893      3600

debt:    1330    2416        6984    13278

 

off-balance sheet debt:

          3488      3875

net debt:

          4599      6291        6091      9678

 

debt / ebitda:

            7.27      9.6        5.11      4.25

 

So in fact they have deleveraged over all and not the other way round.

 

[Spekulatius]

re leverage - another way to look at the leverage is to look at corporate credit rating. I think ADS corporate credit rating is BA1, which is the highest level of junk grade. For comparison, DFS’s rating is BBB- (lowest investment grade rating), COF is BBB and BAC is BBB+. FWIW, I am a bit surprised that BAC rating isn’t higher. I think the rating  agencies generally get the relative grading within the group (or business sector) correct, although I disagree sometimes on how they rate credit risk in disparate sectors.

[LowIQinvestor]

If we don't go into a massive recession I think ADS is a homerun at today's price!

 

Market reacting to Card Services Performance Update For November 2018 that was in-line with what they said on last investor call.

 

Earnings could be cut by 30% and I would still like it here.

 

 

 

 

[vince]

I do have to agree with Vinod though, that their is a limit to the amount of customers that are in Ads's sandbox.  They have a nice trajectory still for 5 plus years but even according to mgmt statements it is limited after their next double.  That doesnt mean that growth will flatline necessarily but it will definitely not grow at 15% plus as we get closer to that double.  And especially from recent prices this should mean fantastic returns but his point about growth eventually slowing dramatically is right on imo

[glorysk87]

Sorry if i irritated you, i am just a small guy that is learning slow. I found my mistake after looking into the old 10-K`s. They had a lot of off-balance sheet debt in 2007/2008 that didn`t show up in my data source. I include the debt from the card business because the income is also in the ebitda number. (Asset-backed securities debt – owed to securitization investors)

 

              2007:    2008:        2012:  2018:

 

%/revenue

epsilon                20.5%        27.0%    29%

Loyalty                31.5%        25.2%    17%

Credit+Private    47.3%        47.6%    54%

 

 

assets:    4162    4357        12000    29763

liabs:      2965    3962        11471    27471

equity:    1197    394          528        2291

 

ebitda:    632      655          1191      2272

 

cash:    219      157          893      3600

debt:    1330    2416        6984    13278

 

off-balance sheet debt:

          3488      3875

net debt:

          4599      6291        6091      9678

 

debt / ebitda:

            7.27      9.6        5.11      4.25

 

So in fact they have deleveraged over all and not the other way round.

 

You didn't irritate me, I was just making sure to point out the correct numbers for you.

[Spekulatius]

Looks like Mr Market hates credit card companies now. SYF, DFS,COF, ADS are all down significantly and ADS is down the most, since it is the highest levered.

 

I looked at DFS annual numbers a few years back and it seems that they also levered a bit up starting in 2016. They also bought back shares like crazy. Current leverage looks Ok, but some of the CC companies may have to stop buying back shares if delinquencies go up and reserves need to be buffed.

[HJ]

I looked at DFS annual numbers a few years back and it seems that they also levered a bit up starting in 2016. They also bought back shares like crazy. Current leverage looks Ok, but some of the CC companies may have to stop buying back shares if delinquencies go up and reserves need to be buffed.

Which company(ies) do you think that has to stop buying back shares?  All consumer finance pure plays (SC, ALLY, SYF, DFS, COF, etc.) are so penalized at this point that valuation is already pricing in a mild recession ala 2001.

 

 

[Spekulatius]

I looked at DFS annual numbers a few years back and it seems that they also levered a bit up starting in 2016. They also bought back shares like crazy. Current leverage looks Ok, but some of the CC companies may have to stop buying back shares if delinquencies go up and reserves need to be buffed.

Which company(ies) do you think that has to stop buying back shares?  All consumer finance pure plays (SC, ALLY, SYF, DFS, COF, etc.) are so penalized at this point that valuation is already pricing in a mild recession ala 2001.

 

I am ny sure whether they have to but DFS seems to have run down their Tier 1 capital ratio by almost 2% points. I doubt they want to go much lower. I guess they can just buy back from continuing earnings, but they probably will have to retain some, if they want to grow their loan book. DFS is BBB- rated and hence barely investment grade. I doubt they want to risk getting into junk credit rating.

 

I think the market is a bit spooked about CC debt. I think in the last quarter, write offs started to increase, but it’s not clear to me that this is a trend. As far as I know they is some cyclicality in these numbers and they tend to spike early in the year (after Xmas).

[Spekulatius]

FWIW, Morningstar has just reduced their fair value for ADS down to $210/share. They don’t expect ADS to hit the 15% growth rates for one thing. if I owned ADS, I would take my tax loss here and move the proceeds into DFS is I liked the sector. I think they are more solid and have equally good upside. just my opinion. I own a small position in COF, which had been a clunker too.

[vince]

FWIW, Morningstar has just reduced their fair value for ADS down to $210/share. They don’t expect ADS to hit the 15% growth rates for one thing. if I owned ADS, I would take my tax loss here and move the proceeds into DFS is I liked the sector. I think they are more solid and have equally good upside. just my opinion. I own a small position in COF, which had been a clunker too.

 

Funny how people reset their valuations when prices fall.  I don't see anything that has negatively affected the economic attractiveness of this business.  I haven't read the Morningstar piece but imo Ads has a wonderful niche where they are positioned incredibly well with regards to competition and I haven't seen any evidence that has changed. ( The recent activities in Syf's end markets would concern me and is something that would potentially change my valuation) They are right on trend for their targeted 6% net charge off rate, they have signed some monster clients that has increased the likelihood of 15% receivables growth rate* (assuming a normal economic backdrop), they are proactively shedding non economic clients, they are shrinking their domain to the likely benefit of shareholders and they are investing capital in their cards business at ridiculous rates of equity returns.  I'm not suggesting the model is bulletproof and people certainly differ in their opinions of valuation but I don't think it's an intelligent use of time to bash the stock on a forum populated by people that are knowledgeable of Ads without one iota of substantive information.  But I would love an opposing argument that maybe can enlighten me to a possible risk that I am missing.  PS... you used Morningstar as a source to support your point that the stock should be sold but their fair value estimate is 40% higher than the current quote with incremental intrinsic value already in the pipe.

 

  * Although receivables growth is an important variable I would be careful in giving it to much weight.  First, at the current  price of Ads you don't need anywhere near 15% growth to do well.  Second, there's no question Ads could grow receivables at faster than mid teen rate (for instance, by not purposefully shedding non-economic clients) but their stated hurdle is 30% ROE's

[KCLarkin]

If I owned ADS, I would take my tax loss here and move the proceeds into DFS is I liked the sector. I think they are more solid and have equally good upside. just my opinion. I own a small position in COF, which had been a clunker too.

 

All three companies have changed significantly in the last ten years, but when I look at the financial performance of each during the financial crisis I don't think they are comparable businesses.

[abitofvalue]

HSN just moved their card program to SYF.  Probably reflects the Liberty influence since QVC / Zuilily were already SYF clients and also extended their programs.

 

I suspect HSN was one of the contracts that ADS stopped counting as 'Active' in recent months.. one wonders how many of these receivables are a reflection of market realities or competition vs actual decisions by ADS to shed clients.

 

Has ADS described the rationale behind shedding accounts? Are these retailers where the program hasn't worked as well as hoped - either growth or credit? or is it a case of ADS expects there to be issuers with the retailer so it is being proactive in stopping issuing loans to their customers? 

[Spekulatius]

FWIW, Morningstar has just reduced their fair value for ADS down to $210/share. They don’t expect ADS to hit the 15% growth rates for one thing. if I owned ADS, I would take my tax loss here and move the proceeds into DFS is I liked the sector. I think they are more solid and have equally good upside. just my opinion. I own a small position in COF, which had been a clunker too.

 

Funny how people reset their valuations when prices fall.  I don't see anything that has negatively affected the economic attractiveness of this business.  I haven't read the Morningstar piece but imo Ads has a wonderful niche where they are positioned incredibly well with regards to competition and I haven't seen any evidence that has changed. ( The recent activities in Syf's end markets would concern me and is something that would potentially change my valuation) They are right on trend for their targeted 6% net charge off rate, they have signed some monster clients that has increased the likelihood of 15% receivables growth rate* (assuming a normal economic backdrop), they are proactively shedding non economic clients, they are shrinking their domain to the likely benefit of shareholders and they are investing capital in their cards business at ridiculous rates of equity returns.  I'm not suggesting the model is bulletproof and people certainly differ in their opinions of valuation but I don't think it's an intelligent use of time to bash the stock on a forum populated by people that are knowledgeable of Ads without one iota of substantive information.  But I would love an opposing argument that maybe can enlighten me to a possible risk that I am missing.  PS... you used Morningstar as a source to support your point that the stock should be sold but their fair value estimate is 40% higher than the current quote with incremental intrinsic value already in the pipe.

 

  * Although receivables growth is an important variable I would be careful in giving it to much weight.  First, at the current  price of Ads you don't need anywhere near 15% growth to do well.  Second, there's no question Ads could grow receivables at faster than mid teen rate (for instance, by not purposefully shedding non-economic clients) but their stated hurdle is 30% ROE's

 

I am not bashing anything. I was merely stating that Morningstar has changed their price target with some rationale. If I were long this stock, I would read it and come to my own conclusions. I don’t own this stock, so I don’t  really care.

 

Edit: One of the issues that Morningstar mentioned that they believe the adjusted earnings that management emphasizes are not true economic earnings and that those are closer to the GAAP numbers, which are considerable lower. This is a concern that has been discussed in this thread as well.

[vince]

HSN just moved their card program to SYF.  Probably reflects the Liberty influence since QVC / Zuilily were already SYF clients and also extended their programs.

 

I suspect HSN was one of the contracts that ADS stopped counting as 'Active' in recent months.. one wonders how many of these receivables are a reflection of market realities or competition vs actual decisions by ADS to shed clients.

 

Has ADS described the rationale behind shedding accounts? Are these retailers where the program hasn't worked as well as hoped - either growth or credit? or is it a case of ADS expects there to be issuers with the retailer so it is being proactive in stopping issuing loans to their customers?

 

I should have been more clear, these are liquidations, bankruptcies and m&a.  The point I was trying to make is that mgmt could have been less aggressive which would look better on their growth rates however, by moving quickly they can focus on newer signings and also free up that capital for the newer signings.  A quote from 3rd qtr CC follows......    "All right, let's go to outlook, be Slide 11. Active client receivables growth, we expect to continue in the mid-teens. Nonstrategic clients, now what does that all mean? Nonstrategic clients is nothing more than saying those clients that are in liquidation, that have gone bankrupt or in decline due to M&A. In other words, if you're on the other side of M&A, you're acquired. You don't tend to have the type of growth that you've had in the past. They will be aggressively removed from the portfolio. And what this essentially means is reported growth will slow, and then recover as we move throughout 2019, while, at the same time, active client growth remains very strong throughout. This frees up capital and makes room for a record new vintage. And frankly, we can't really help the clients at this point who are in liquidation and bankruptcy. Our model, which drives loyalty and incremental sales, really isn't any -- isn't effective if the client is bankrupt or liquidating or sold off. So strategically, I don't think we're doing a disservice to ourselves or to the client.

 

And also rather than having a slow bleed over the next 2 years, we're moving these files aggressively out of our active programs. We've got over half done so far, and we'll get the final piece done in Q4. So this is not something that's going to linger around. This is a very, very big piece of our strategic focus.

 

New signings, we've talked about, are on track for $4 billion vintage. And then we talked about the 15 to 18 signings are already 1/4 of the portfolio. We want them to be at 50% in 2 years.

 

So there's a lot of numbers floating around. What does it really mean? If you look at the signings over the past several years, and you look at our portfolio today, the portfolio today only reflects about $4.5 billion of the spool-up of these vintages. When these vintages are fully spooled up over the next couple of years, they will be a total of $11 billion. So we're not even halfway there in terms of what the existing signed clients will spool up to be, which gives us a lot of confidence in what we're doing today"

[Foreign Tuffett]

ADS has relatively lower charge offs then would be expected from the likely credit profile of their cardholders, right?*

 

I think part of the reason is that an overly indebted consumer is more likely to pay off lower balance, high interest rate CCs than they are to pay off higher balance, lower interest rate CCs. ADS' "store cards" are, almost by definition, low credit line and high interest rate. For example, the Victoria's Secret store card can only be used at L Brands' stores, some cardholders have credit limits as low as $250 (if not even lower), and the current APR for new sign ups is 27%.

 

 

* We don't know the average credit score of an ADS cardholder, but it's probably not particularly high. As Cameron pointed out earlier in this thread, ADS acquired Signet's CC receivables portfolio in 2017. There's some evidence that Signet was giving credit to anyone with a pulse. It's also well-known that Victoria's Secret store cards are easy to get approved for.

 

[vince]

ADS has relatively lower charge offs then would be expected from the likely credit profile of their cardholders, right?*

 

I think part of the reason is that an overly indebted consumer is more likely to pay off lower balance, high interest rate CCs than they are to pay off higher balance, lower interest rate CCs. ADS' "store cards" are, almost by definition, low credit line and high interest rate. For example, the Victoria's Secret store card can only be used at L Brands' stores, some cardholders have credit limits as low as $250 (if not even lower), and the current APR for new sign ups is 27%.

 

 

* We don't know the average credit score of an ADS cardholder, but it's probably not particularly high. As Cameron pointed out earlier in this thread, ADS acquired Signet's CC receivables portfolio in 2017. There's some evidence that Signet was giving credit to anyone with a pulse. It's also well-known that Victoria's Secret store cards are easy to get approved for.

 

lots of info on fico scores in 10k, i think u will be pleasantly surprised.  and yes u are right with about the character of their loans, which makes it more likely that their loans get paid off

[kab60]

Nothing new to see but a decent introduction: https://seekingalpha.com/article/4236137-tao-value-q4-2018-letter

[LowIQinvestor]

Alliance Data Systems: Epsilon President Bryan Kennedy to Get $1.1M Bonus on Closing of Epsilon Transaction

[decko]

Rev beat, Eps slightly down.  Expectations of 1st qtr 2019 is bringing it down today.  Does anyone have an opinion on the earnings and the outlook for 2019.?

[glorysk87]

EPS guide affected by provision build on new vintages in cards as well as the disposition of held for sale receivables. EPS guide also doesn't include any impact from the sale of Epsilon. In all likelihood actual 2019 EPS will be materially higher than $22.00.

[decko]

Agreed. But I have a concern with future earnings and it involves marketing.  With the sell of Epsilon where is the strength of marketing for this company?  They are transitioning out of the 1990's retail companies into leisure and ecommerce.  In the past they used Epsilon with their Card Services to provide an unique service.  As stated above they are selling epsilon.  Will ADS be strictly be a Card service company without marketing?  If not, if ADS will be marketing for their customers what will it look like?  I could ask more marketing questions but final picture im painting is the concern about their moat.  Has ADS unique moat disappeared because of the dynamic change in retail and how the new consumer interacts with these new retail companies?

[glorysk87]

Agreed. But I have a concern with future earnings and it involves marketing.  With the sell of Epsilon where is the strength of marketing for this company?  They are transitioning out of the 1990's retail companies into leisure and ecommerce.  In the past they used Epsilon with their Card Services to provide an unique service.  As stated above they are selling epsilon.  Will ADS be strictly be a Card service company without marketing?  If not, if ADS will be marketing for their customers what will it look like?  I could ask more marketing questions but final picture im painting is the concern about their moat.  Has ADS unique moat disappeared because of the dynamic change in retail and how the new consumer interacts with these new retail companies?

 

They have a 500-person data science and marketing team that's part of the cards business. So they will certainly still be offering targeted marketing and loyalty services to their cards clients. As discussed on today's conference call, the plan to fill the rest of the gap left by Epsilon is to sign service agreements between the two companies to maintain their access to Epsilon's technology. They intend to have service agreements for the digital channels and the demographic/psychographic datasets.

[decko]

I guess i should have done my homework first.. Apologies.

Edward Heffernan "Additionally, to the industry-leading growth rate, our industry-leading return on equity. So our ROEs are 30% and/or more, which is anywhere between 2 to 3x what the industry is at. A lot of people keep sort of scratching their heads saying, "How can you be growing so fast and have ROEs that are 2 or 3x the industry?" And the answer is, again, we play in a sandbox that, we believe, we have unique advantages. And the uniqueness of our advantage is the fact that everything we do is in-house, from the actual network itself, we don't outsource that. The customer care is done in-house. The collections are done in-house. The marketing, the database -- the databases that we build, they're all done in-house. And with that, that allows us to approach the industry in a holistic manner and allows us to have the uniqueness that comes with a close-loop type network that can extract not only who the customer is of the client, but also what she purchased down to the SKU level. And we use that type of information to then go back on a one-to-one personalized basis through the various digital channels as well as some of the more traditional channels to drive that incremental purchase. And it's those incremental purchases that sort of set us above and apart from sort of the more traditional banks and card players in the industry." 

 

So, the question now is this company extremely undervalued?  if they are able to navigate through this transition without any major permanent damage to the company?  It looks like they could be hitting $26-$28 eps in 2020.  That's pretty attractive even at a 10 multiple. Near 60% upside in 2-3 years. Please poke holes in this assessment