This credit card marketer beat analysts’ estimates by $0.10 in its most recent quarter.
Alliance Data Systems Corp. (ADS)
From Argus Weekly Staff Report
We are initiating coverage of Alliance Data Systems Corp. (ADS). The company provides private-label credit cards and marketing services, and administers a large Canadian loyalty rewards program. Although Alliance is subject to a challenging environment for retailers, we expect it to post solid operating results in the coming years. In particular, we believe that the company’s private-label and co-branded credit card business, which accounts for more than half of revenue, will be largely unaffected by the shift to e-commerce, as we expect clients’ cards to be used whether consumers purchase goods in stores or online.
In addition, although new regulations in Canada are weighing on results in the company’s LoyaltyOne division, we expect this business to stabilize as the new rules become more established. Despite current pressure in the LoyaltyOne business, we have a positive view of the company’s prospects and believe that ADS shares are favorably valued at 14.0-times our 2017 EPS estimate, toward the low end of the five-year annual average range of 10-26.
We are setting a 2017 core EPS forecast of $18.70, up 10.5% from 2016, on a 9.3% increase in revenue. In 2018, we look for core EPS to increase 17.9%, to $22.05, on an 11% advance in revenue.
Our target price of $309 implies a projected 2017 P/E multiple of 16.5, still in the lower half of the five-year range, and a PEG ratio of 1.1, well below the peer average of 3.0. Combined with the dividend, our target represents a potential return of 19% from current levels.
We believe that ADS shares are attractively valued at current prices, near the high end of their 52-week range of $193-$266. From a technical standpoint, the shares are trading in a bullish pattern of higher highs and higher lows that dates to February 2016.
On the fundamentals, the shares are trading toward the low end of their historical range and below peer group averages. The shares are also trading below the peer average P/E of 25, and at a price/sales multiple of 2.0, below the peer average of 4.0. Despite the potential for slower near-term growth in the rewards business due to new regulations in Canada, we believe that current valuation discounts are excessive given the company’s generally strong prospects.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, July 21, 2017