On Jun 25, 2015, we issued updated research report on Alliance Data Systems Corporation ADS.
Alliance Data boasts an impressive inorganic growth story with prudent acquisition that it has made over the last several years. These have diversified and solidified its portfolio apart from ramping up its growth profile. Its acquisition of Conversant Inc. last December that it merged with Epsilon, will boost Alliance Data’s position in the digital marketing channels, in particular display. The acquisition also broadened Alliance Data's Omni-Channel distribution capabilities. Alliance Data is banking heavily on the Conversant acquisition and expects higher contribution in the latter half of 2015 as initiatives there gain traction. With solid financial strength and flexibility, we expect Alliance Data to pursue strategic acquisitions that would boost its growth profile.
Alliance Data has been generating solid results on operational strength across all its segments. BrandLoyalty, which entered Canada late in 2014, is expected to generate about $50 million in revenues from North America this year. Epsilon is well positioned to achieve 7% growth in revenues as well as EBITDA given its successful offshore initiatives (it increased the offshore presence by 200 jobs). Card Services continues to deliver double-digit revenue and EBITDA growth, marking 13 straight quarters of such achievement. Alliance Data hence expects a robust 2015 as its fundamental strength is supported by a stable credit environment, low funding costs and expense leverage.
Backed by solid financial flexibility (supported by sustained solid operational performance), Alliance Data now targets $1 billion (up from $600 million approved in Jan 2015) in share buyback in 2015. In fact, the company stated that its primary capital allocation for 2015 will be for share repurchases.
Nonetheless, escalating expenses inducing margin contraction remains a concern.
In addition, AIR MILES reward miles issued is directly proportional to reward miles available for redeeming in the future. This in turn might affect revenues. The company expects AIR MILES reward miles issuance to grow as sponsors accelerate their promotional activity with new AIR MILES Cash initiatives.
Moreover, the company’s increasing expenses and dependence on limited clients for revenues pose as concerns.
With respect to quarterly performance, this Zacks Rank #3 (Hold), financial transaction service provider’s first-quarter earnings per share beat estimates on solid organic growth, contribution from the Conversant acquisition and a lower share count. The company delivered positive surprises in each of the last four quarters, with an average beat of 4.9%. The expected long-term earnings growth is currently pegged at 14.5%.
Stocks to Consider
Some better-ranked stocks from the same industry are Qiwiplc QIWI, Global Payments Inc. GPN, and Green Dot Corporation GDOT. While Qiwiplc sports a Zacks Rank #1 (Strong Buy), Global Payments and Green Dot Corporation carry a Zacks Rank #2 (Buy).
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