Alliance Data Initiatives Bode Well, Expenses Hurt Margin - Analyst Blog

On Nov 14, 2014, we issued an updated research report on Alliance Data Systems Corp. (ADS).

The bottom line of Alliance Data in the third quarter outperformed the Zacks Consensus Estimate and year-ago earnings courtesy of strong performance across all segments. The top line also fared well on both counts driven by double-digit increases in LoyaltyOne and Private Label Services and Credit, and a high single-digit increase in Epsilon.

Given solid performance, the company raised core the EPS expectation to $12.40 from $12.35 on revenues of $5.30 billion. Alliance Data expects to deliver core EPS in the $14.80 to $15.00 range on revenues of $6.625 billion. While this translates into a year-over-year increase of 20% for core EPS, it is 25% for revenue.

Alliance Data has achieved its year-end goal of 13 million collectors under its dotz coalition loyalty program in Brazil. Dotz now operates in 10 regions and company aims to enter three additional Brazilian markets by 2014 taking the tally to 13.

Alliance Data has made several strategic acquisitions to grow inorganically. The recent was the agreement to acquire Conversant, Inc. (CNVR) that will lead to enhanced growth in the digital marketing segment along with the widening of omni-channel distribution capabilities. With solid financial strength and flexibility, we expect Alliance Data to pursue strategic acquisitions that would help it to boost its growth profile.

The company has been continuously pursuing share repurchases that in turn is also aiding the bottom line. In the first nine months of 2014, the company spent $217.5 million to buy back 0.9 million shares. It is still left with $182.5 million under its authorization.

However, Alliance Data has been witnessing a rise in expenses over the past few years. The increase is largely owing to higher cost of operations and increased general and administrative expense. As a result, operating margin continues to contract.

In addition, AIR MILES reward miles issued is directly proportional to AIR MILES reward miles available to be redeemed in the future. This in turn might affect revenues. The company expects AIR MILES reward miles issuance to grow in the low single-digit range.

Alliance Data presently carries a Zacks Rank #3 (Hold). Some better-ranked financial transaction service providers include Envestnet, Inc. (ENV) and The Western Union Co. (WU). While Envestnet sports a Zacks Rank #1 (Strong Buy), Western Union carries a Zacks Rank #2 (Buy).

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