Alliance Data's Catalysts Are Priced In, Cowen Says In Downgrade

Shares of Alliance Data Systems Corporation ADS, a provider of private label credit cards and loyalty programs, are approaching fair value, according to Cowen.

The Analyst

Cowen analyst George Mihalos downgraded shares of Alliance Data from Outperform to Market Perform with a $277 price target.

The Thesis

Key 2018 catalysts for Alliance Data, including the delinquency "wedge" and tax reform, are now being fully reflected in 2018 estimates, Mihalos said in a Monday note. The analyst projects few additional catalysts on the horizon, suggesting EBITDA and earnings per share growth will peak in 2018.

Mihalos models a return to a more normalized 8.6-percent EBITDA growth and 19-percent EPS growth in 2019.

The card services segment is the driver of the company's estimated outsized growth in 2018, he said. But Mihalos expects a deceleration in card services EBITDA growth to 9 percent in 2019, given slowing receivables growth and rising losses.

"Our view that provision expense will need to grow at least in-line with receivables results in a high-single-digit drag to segment EBITDA growth," the analyst said. 

Cowen predicts a more muted long-term growth trajectory due to expectations that loss rates will rise in the late stage of credit cycle; a need to tighten lending; and the peaking of the receivables growth spread vs. peer Synchrony Financial SYF.

A sizable valuation premium for Alliance Data is unwarranted, Mihalos said. 

The Price Action

Alliance Data shares are up about 17 percent over the past year.

At the time of writing, the shares were slipping 1.33 percent to $258.39.

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