Alliance Data Systems: Another Way To Play A Recovery

Price:$124;Forward P/E:13;Earnings Growth:30%;Projected Sales Growth:10.4%;Market Cap:$6.12 billion

Why It's Featured: Credit card rewards programs growing.
Danger Zones: Mobile payments; economic slowdown; highly leveraged.

Alliance Data Systems Corporation ADS provides data-driven and transaction-based marketing, and customer loyalty solutions primarily in the United States and Canada.  It facilitates and manages interactions between its clients and their customers through various consumer marketing channels, including in-store, online, catalog, mail, telephone, email, mobile, and social media.

The company's LoyaltyOne segment offers AIR MILES Reward Program that enables consumers to earn AIR MILES reward miles as they shop within a range of retailers and other sponsors participating in the AIR MILES Reward Program; and offers loyalty services, including loyalty consulting, customer analytics, and creative services.

Its Epsilon group provides integrated direct marketing solutions, which combine database marketing technology and analytics with various direct marketing services comprising email marketing campaigns.  This division's marketing services include strategic consulting and creative services, database design and management, data services, analytical services, and digital communications.

The Private Label Services and Credit segment offers credit card processing, billing and payment processing, customer care, and collections services for private label retailers, as well as private label retail credit card receivables financing, including securitization of the credit card receivables that it underwrites from its private label retail credit card programs.  This division also captures and analyzes transaction data to assist its clients in acquiring, retaining, and managing repeat customers.

Alliance Data Systems Corporation serves various markets, such as financial services, specialty retail, grocery and drugstore chains, petroleum retail, automotive, hospitality and travel, telecommunications, and pharmaceuticals.  The company was founded in 1996 and is headquartered in Plano, Texas. (For more stock ideas, see: www.theonlineinvestor.com)

We don't like to toot our horns too loudly here at the OLI but would like to point out that we featured this stock in 2009 when it was $62 a share.  We wish we had bought some then.  With its price double that, what lies ahead for this market beater?

Most likely higher prices.  The stock is up 25% in the last 2 months thanks to a great finish to 2011.  Fourth quarter results beat analysts' estimates by 14.1%, with final numbers at $1.70 vs the expectation of $1.49.  Total for the year finished 30% higher than 2010 at $7.64 compared to $5.86.  This year, analysts have a consensus estimate of $8.50, then see $9.62 in 2013.  First quarter results are expected to show $2.15 vs $2.03 in last year's first.  Second quarter consensus is for $1.99 compared to $1.75 in 2011's second.

Part of the growth is coming from the Epsilon division, the online marketing group specializing in permission-based email marketing that sends over 40 billion emails annually.  New customers are being added consistently.  Also helping is the addition of Aspen Marketing Services, a marketing service group specializing in the design of campaigns for direct mail, email and others.

Alliance is an international company with notable growth in Brazil where a new campaign called Dotz has been introduced and is being rolled out nationally after a successful regional program.  It's an online business loyalty program working in conjunction with Banco do Brasil.  There are currently 70 online sponsors and traditional sponsors in financial services, gas and grocery outlets with over 500,000 active participants. 

Alliance will benefit most if the economy continues to improve, and consumers feel they can spend a little more.  That's already beginning as credit card spending improved dramatically in 2011.  ADS's programs and rewards are allied with credit card usage.

That's all the good news.  The bad news is the stock price reflects most if not all of it with a new high being hit almost daily.  Valuations are starting to get stretched.  Investors who like the story may want to wait and see if there's a pullback before considering a purchase.  However, there hasn't been a meaningful drop in the price since 2008 and early 2009 when the whole market was in a free fall.  In March of 2009, the stock traded at $22.80. 

Beside the recent price spike of 25% in the last couple of months, there's the matter of debt.  It's 95% of capital.  This is a highly leveraged company with total debt of almost $7 billion.  Debt to equity is 1900%.  When interest rates rise as economies recover, expect interest payments for ADS to do the same.  Right now earnings cover interest payments by 6.9 times.

- Essential numbers:
-  Price to sales ratio: 1.94
- Price to book: 34.81
- Operating margin: 25.61%
- Profit margin: 9.94%
- Return on equity: 316%
- Revenues in last 12 months: $3.17 billion
- Total cash: $216.21 million
- Cash per share: $4.32
- Current ratio: 1.71
- Book value per share: $3.53
- Beta: 1.33
- 52 week change: 57.32%
- Shares outstanding: 50.04 million
- Float: 48.42 million
- Held by insiders: 2.75%
- Held by institutions: 135.1%
- There is no dividend.

A couple of numbers flash red: price to book of 34 means this isn't a stock that Warren Buffett would own.  And the leverage was already described.  So caution is warranted, but this company could see earnings improve even more as previous acquisitions may begin to boost profits as they are more assimilated into ADS's way of doing business.

- Company Web site: www.alliancedata.com

- Ted Allrich
March 15, 2012