This loyalty marketing company’s shares were recently initiated at Jefferies and at Sterne Agee CRT, with a ‘Buy’ rating. Two analysts have raised their EPS forecasts for this quarter and six for the June quarter.
Alliance Data Systems (ADS)
From Cabot Benjamin Graham Value Investor
Alliance Data Systems (ADS; Max Buy Price 192.71) provides data-driven and loyalty transaction-based marketing services to businesses in a variety of industries. The company operates in three segments:
1. LoyaltyOne includes the company’s Canadian AIR MILES Reward and BrandLoyalty programs.
2. Epsilon provides direct marketing.
3. Private Label Services and Credit, the company’s private label and co-brand retail credit card program, offers risk management, account origination and funding, transaction processing, customer care, collections and marketing.
In December 2014, Alliance acquired Conversant, a data analytics leader in the area of digital marketing.
Conversant has exceeded expectations with significant sales and earnings contributions. In addition, Alliance’s BrandLoyalty program expanded into Canada in late 2014 and has successfully generated $50 million in new contracts. Management will continue to focus on acquiring companies to bolster future growth, and buy back shares when stock is used to facilitate acquisitions. The company already bought back more than half of the shares issued for the Conversant acquisition. Alliance also uses share repurchases as a tool to mitigate the adverse impact of foreign exchange rates.
Alliance Data Systems boosted sales in 14 of the past 15 years, and improved EPS (earnings per share) by at least 10% every year during the past 15 years. The company does not pay a dividend and probably will not begin paying dividends in the foreseeable future. Sales and earnings increased 20% in 2015 and will likely rise 15% in 2016, although management recently revealed lower growth expectations for 2016.
In my view, management is setting low forecasts for 2016 results, and Alliance will easily beat management’s low estimates, thereby creating surges in the stock price during the year ahead. The tepid forecast sent ADS shares tumbling, where they are now clearly undervalued. ADS shares are undervalued at 12.8 times latest EPS.
The company’s balance sheet is strong with more than $1 billion in cash, and my risk rating for ADS is Low. ADS will likely climb 50% and reach my 289.15 sell target within two years. Buy at 192.71 or below.
J. Royden Ward, Cabot Benjamin Graham Value Investor, www.cabot.net, 978-745-5532, February 4, 2016