This loyalty solutions company beat analysts’ estimates by $0.07 last quarter, and nine analysts have recently increased their EPS forecasts for the company.
Alliance Data Systems Corporation (ADS)
From Validea Hot List Newsletter
Strategy: Contrarian Investor
Based on: David Dreman
Alliance Data Systems Corporation (ADS) is a provider of data-driven marketing and loyalty solutions serving consumer-based businesses in a range of industries. The company offers a portfolio of integrated outsourced marketing solutions, including customer loyalty programs, database marketing services, end-to-end marketing services, analytics and creative services, direct marketing services, and private label and co-brand retail credit card programs. The company operates through three segments: LoyaltyOne, which provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty Group B.V. (BrandLoyalty); Epsilon, which provides end-to-end, integrated direct marketing solutions, and Card Services, which provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the Company’s private label and co-brand retail credit card programs.
MARKET CAP: PASS: Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of “accounting gimmickry”, and companies of this size have more staying power. ADS has a market cap of $11,402 million, therefore passing the test.
EARNINGS TREND: PASS: A company should show a rising trend in the reported earnings for the most recent quarters. ADS’s EPS for the past 2 quarters, (from earliest to most recent quarter) 3.93, 5.39 have been increasing, and therefore the company passes this test.
EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS: This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. ADS passes this test as its EPS growth rate over the past 6 months (83.33%) has beaten that of the S&P (17.64%). ADS’s estimated EPS growth for the current year is (75.21%), which indicates the company is expected to experience positive earnings growth. As a result, ADS passes this test.
RETURN ON EQUITY: PASS: The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 large cap stocks, which is 18.38%, and would consider anything over 27% to be staggering. The ROE for ADS of 45.54% is high enough to pass this criterion.
PRE-TAX PROFIT MARGINS: PASS: This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. ADS’s pre-tax profit margin is 14.44%, thus passing this criterion.
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, November 2, 2018