Summary
- Alliance Data Systems Corporation (ADS) is a marketing and loyalty programs provider headquartered in Columbus, Ohio ().
- In this post we provide a simulation-based (sim-based) valuation () of ADS.
- Our results suggest the following fair values – stock price: $156.13, and price-to-earnings ratio: 18.16.
- ADS trades at $77 at the time of this writing, so it appears to be undervalued, with a potential upside of a little more than 100%.
Alliance Data Systems Corporation (ADS)
Alliance Data Systems Corporation (ADS) is a marketing and loyalty programs provider headquartered in Columbus, Ohio. Among other things, the company provides private label credit and debit cards, which allows them to also add value to their clients by developing and executing data-driven marketing initiatives. Recently ADS announced the upcoming acquisition of Bread, a digital payments company.
The company operates in two main segments: Card Services and LoyaltyOne. Card Services makes up about 80% of the company’s revenues; it involves transaction processing and customer collections services. LoyaltyOne generates approximately 20% of the revenues, and involves data-driven marketing initiatives. Financial services providers, grocers, drug stores, and specialty retailers are among the company’s main clients.
Estimating a fair value for the stock
In this post we provide a simulation-based (sim-based) valuation () of ADS.
At the time of this writing the company had a trailing twelve months price-to-earnings ratio of 11.63. The trailing twelve months price-to-cash flow ratio was 5.57. Earnings growth trends have been remarkably positive recently. We will set our sim-based estimated earnings growth rate for the next 5 years to be the group average, at 18.39% - to be somewhat conservative.
The table below summarize our sim-based results.
Since our sim-based analysis uses a S&P 500 return as a basis, our results summarized on the table above suggest the following fair values – stock price: $156.13, and price-to-earnings ratio: 18.16. ADS trades at about $77 at the time of this writing, so it appears to be undervalued, with a potential upside of a little more than 100%.
Final thoughts
Like many companies that extend credit to customers (e.g., car and equipment manufacturers), ADS is often presented as having a very high debt load. This can be misleading, because the company does not have to pay interest on debt that others owe to it. In fact, this type of debt generates a significant amount of interest income. The problem is the risk of default, which is countered by data-driven credit analyses prior to lending approval.
The expectation of growth in the short term is way above the group average of 18.39%. Still, the company is currently valued as if there will be little to no growth going forward. The reason for this is that some of the retailers that ADS works with are having serious problems, even though ADS also has partnerships with retailers that are doing quite well. With the synergistic acquisition of Bread, it is quite possible that ADS will experience above-average growth in the next 5 years.
Disclosure
The author owns ADS shares at the time of this writing.
