Intrinsic value of Alliance Data Systems - ADS

Previous Close

$228.77

  Intrinsic Value

$214.12

stock screener

  Rating & Target

hold

-6%

  Value-price divergence*

-76%

Previous close

$228.77

 
Intrinsic value

$214.12

 
Up/down potential

-6%

 
Rating

hold

 
Value-price divergence*

-76%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ADS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 12.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  10.84
  4.20
  4.28
  4.35
  4.42
  4.48
  4.53
  4.57
  4.62
  4.66
  4.69
  4.72
  4.75
  4.77
  4.80
  4.82
  4.84
  4.85
  4.87
  4.88
  4.89
  4.90
  4.91
  4.92
  4.93
  4.94
  4.94
  4.95
  4.95
  4.96
  4.96
Revenue, $m
  7,138
  7,438
  7,756
  8,094
  8,451
  8,829
  9,229
  9,651
  10,097
  10,567
  11,063
  11,585
  12,135
  12,714
  13,324
  13,966
  14,641
  15,352
  16,099
  16,885
  17,710
  18,579
  19,491
  20,451
  21,459
  22,518
  23,631
  24,800
  26,029
  27,319
  28,675
Variable operating expenses, $m
 
  5,964
  6,203
  6,456
  6,725
  7,009
  7,309
  7,626
  7,960
  8,313
  8,685
  8,697
  9,110
  9,545
  10,003
  10,485
  10,992
  11,525
  12,086
  12,676
  13,296
  13,948
  14,633
  15,353
  16,110
  16,905
  17,741
  18,619
  19,541
  20,510
  21,528
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  5,873
  5,964
  6,203
  6,456
  6,725
  7,009
  7,309
  7,626
  7,960
  8,313
  8,685
  8,697
  9,110
  9,545
  10,003
  10,485
  10,992
  11,525
  12,086
  12,676
  13,296
  13,948
  14,633
  15,353
  16,110
  16,905
  17,741
  18,619
  19,541
  20,510
  21,528
Operating income, $m
  1,266
  1,474
  1,553
  1,637
  1,726
  1,821
  1,920
  2,025
  2,137
  2,254
  2,377
  2,888
  3,025
  3,169
  3,321
  3,481
  3,649
  3,826
  4,013
  4,208
  4,414
  4,631
  4,858
  5,097
  5,349
  5,613
  5,890
  6,181
  6,488
  6,809
  7,147
EBITDA, $m
  1,778
  2,018
  2,104
  2,196
  2,293
  2,395
  2,504
  2,618
  2,739
  2,867
  3,001
  3,143
  3,292
  3,450
  3,615
  3,789
  3,972
  4,165
  4,368
  4,581
  4,805
  5,041
  5,288
  5,548
  5,822
  6,109
  6,411
  6,728
  7,062
  7,412
  7,780
Interest expense (income), $m
  405
  374
  380
  413
  448
  486
  525
  567
  611
  657
  706
  758
  813
  870
  930
  994
  1,061
  1,131
  1,206
  1,283
  1,365
  1,452
  1,542
  1,637
  1,737
  1,842
  1,953
  2,069
  2,191
  2,319
  2,454
Earnings before tax, $m
  837
  1,100
  1,173
  1,224
  1,278
  1,335
  1,395
  1,459
  1,526
  1,596
  1,671
  2,129
  2,212
  2,299
  2,391
  2,487
  2,588
  2,695
  2,807
  2,925
  3,049
  3,179
  3,316
  3,460
  3,611
  3,770
  3,937
  4,112
  4,297
  4,490
  4,693
Tax expense, $m
  319
  297
  317
  330
  345
  360
  377
  394
  412
  431
  451
  575
  597
  621
  645
  671
  699
  728
  758
  790
  823
  858
  895
  934
  975
  1,018
  1,063
  1,110
  1,160
  1,212
  1,267
Net income, $m
  432
  803
  856
  894
  933
  974
  1,018
  1,065
  1,114
  1,165
  1,220
  1,554
  1,615
  1,678
  1,745
  1,816
  1,890
  1,967
  2,049
  2,135
  2,226
  2,321
  2,421
  2,526
  2,636
  2,752
  2,874
  3,002
  3,137
  3,278
  3,426

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,859
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  25,514
  24,628
  25,683
  26,800
  27,984
  29,236
  30,560
  31,958
  33,434
  34,990
  36,631
  38,361
  40,182
  42,101
  44,120
  46,245
  48,482
  50,834
  53,308
  55,909
  58,644
  61,519
  64,541
  67,718
  71,055
  74,563
  78,248
  82,120
  86,188
  90,461
  94,950
Adjusted assets (=assets-cash), $m
  23,655
  24,628
  25,683
  26,800
  27,984
  29,236
  30,560
  31,958
  33,434
  34,990
  36,631
  38,361
  40,182
  42,101
  44,120
  46,245
  48,482
  50,834
  53,308
  55,909
  58,644
  61,519
  64,541
  67,718
  71,055
  74,563
  78,248
  82,120
  86,188
  90,461
  94,950
Revenue / Adjusted assets
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
  0.302
Average production assets, $m
  1,685
  1,755
  1,830
  1,910
  1,994
  2,084
  2,178
  2,278
  2,383
  2,494
  2,611
  2,734
  2,864
  3,001
  3,145
  3,296
  3,455
  3,623
  3,799
  3,985
  4,180
  4,385
  4,600
  4,826
  5,064
  5,314
  5,577
  5,853
  6,143
  6,447
  6,767
Working capital, $m
  10,359
  3,719
  3,878
  4,047
  4,226
  4,415
  4,615
  4,826
  5,048
  5,284
  5,531
  5,792
  6,068
  6,357
  6,662
  6,983
  7,321
  7,676
  8,049
  8,442
  8,855
  9,289
  9,746
  10,225
  10,729
  11,259
  11,815
  12,400
  13,014
  13,660
  14,337
Total debt, $m
  12,549
  10,859
  11,807
  12,813
  13,879
  15,006
  16,197
  17,455
  18,783
  20,184
  21,661
  23,218
  24,857
  26,584
  28,401
  30,314
  32,326
  34,443
  36,670
  39,011
  41,473
  44,060
  46,780
  49,639
  52,643
  55,800
  59,116
  62,601
  66,262
  70,108
  74,148
Total liabilities, $m
  23,856
  22,166
  23,114
  24,120
  25,186
  26,313
  27,504
  28,762
  30,090
  31,491
  32,968
  34,525
  36,164
  37,891
  39,708
  41,621
  43,633
  45,750
  47,977
  50,318
  52,780
  55,367
  58,087
  60,946
  63,950
  67,107
  70,423
  73,908
  77,569
  81,415
  85,455
Total equity, $m
  1,658
  2,463
  2,568
  2,680
  2,798
  2,924
  3,056
  3,196
  3,343
  3,499
  3,663
  3,836
  4,018
  4,210
  4,412
  4,625
  4,848
  5,083
  5,331
  5,591
  5,864
  6,152
  6,454
  6,772
  7,106
  7,456
  7,825
  8,212
  8,619
  9,046
  9,495
Total liabilities and equity, $m
  25,514
  24,629
  25,682
  26,800
  27,984
  29,237
  30,560
  31,958
  33,433
  34,990
  36,631
  38,361
  40,182
  42,101
  44,120
  46,246
  48,481
  50,833
  53,308
  55,909
  58,644
  61,519
  64,541
  67,718
  71,056
  74,563
  78,248
  82,120
  86,188
  90,461
  94,950
Debt-to-equity ratio
  7.569
  4.410
  4.600
  4.780
  4.960
  5.130
  5.300
  5.460
  5.620
  5.770
  5.910
  6.050
  6.190
  6.310
  6.440
  6.560
  6.670
  6.780
  6.880
  6.980
  7.070
  7.160
  7.250
  7.330
  7.410
  7.480
  7.550
  7.620
  7.690
  7.750
  7.810
Adjusted equity ratio
  -0.008
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  432
  803
  856
  894
  933
  974
  1,018
  1,065
  1,114
  1,165
  1,220
  1,554
  1,615
  1,678
  1,745
  1,816
  1,890
  1,967
  2,049
  2,135
  2,226
  2,321
  2,421
  2,526
  2,636
  2,752
  2,874
  3,002
  3,137
  3,278
  3,426
Depreciation, amort., depletion, $m
  512
  544
  551
  559
  566
  575
  584
  593
  603
  613
  624
  256
  268
  280
  294
  308
  323
  339
  355
  372
  391
  410
  430
  451
  473
  497
  521
  547
  574
  603
  632
Funds from operations, $m
  1,845
  1,347
  1,408
  1,452
  1,499
  1,549
  1,602
  1,658
  1,717
  1,778
  1,844
  1,810
  1,882
  1,959
  2,039
  2,124
  2,212
  2,306
  2,404
  2,508
  2,616
  2,731
  2,851
  2,977
  3,109
  3,249
  3,395
  3,549
  3,711
  3,880
  4,059
Change in working capital, $m
  -243
  150
  159
  169
  179
  189
  200
  211
  223
  235
  248
  261
  275
  290
  305
  321
  338
  355
  374
  393
  413
  434
  456
  480
  504
  530
  556
  585
  614
  645
  678
Cash from operations, $m
  2,088
  1,197
  1,248
  1,283
  1,321
  1,360
  1,402
  1,447
  1,494
  1,543
  1,596
  1,549
  1,607
  1,669
  1,734
  1,803
  1,875
  1,951
  2,031
  2,115
  2,203
  2,296
  2,394
  2,497
  2,605
  2,719
  2,839
  2,964
  3,096
  3,235
  3,381
Maintenance CAPEX, $m
  0
  -157
  -164
  -171
  -179
  -186
  -195
  -204
  -213
  -223
  -233
  -244
  -256
  -268
  -280
  -294
  -308
  -323
  -339
  -355
  -372
  -391
  -410
  -430
  -451
  -473
  -497
  -521
  -547
  -574
  -603
New CAPEX, $m
  -207
  -70
  -75
  -80
  -84
  -89
  -94
  -100
  -105
  -111
  -117
  -123
  -130
  -137
  -144
  -151
  -159
  -168
  -176
  -185
  -195
  -205
  -215
  -226
  -238
  -250
  -263
  -276
  -290
  -305
  -320
Cash from investing activities, $m
  -4,063
  -227
  -239
  -251
  -263
  -275
  -289
  -304
  -318
  -334
  -350
  -367
  -386
  -405
  -424
  -445
  -467
  -491
  -515
  -540
  -567
  -596
  -625
  -656
  -689
  -723
  -760
  -797
  -837
  -879
  -923
Free cash flow, $m
  -1,975
  969
  1,009
  1,033
  1,058
  1,085
  1,113
  1,143
  1,176
  1,210
  1,246
  1,182
  1,222
  1,265
  1,310
  1,357
  1,407
  1,460
  1,516
  1,574
  1,636
  1,701
  1,769
  1,841
  1,917
  1,996
  2,079
  2,167
  2,259
  2,356
  2,458
Issuance/(repayment) of debt, $m
  3,865
  169
  949
  1,006
  1,065
  1,127
  1,191
  1,258
  1,328
  1,401
  1,477
  1,556
  1,640
  1,726
  1,817
  1,913
  2,012
  2,117
  2,226
  2,341
  2,462
  2,588
  2,720
  2,859
  3,004
  3,157
  3,317
  3,485
  3,661
  3,846
  4,040
Issuance/(repurchase) of shares, $m
  -780
  2
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  2,693
  171
  949
  1,006
  1,065
  1,127
  1,191
  1,258
  1,328
  1,401
  1,477
  1,556
  1,640
  1,726
  1,817
  1,913
  2,012
  2,117
  2,226
  2,341
  2,462
  2,588
  2,720
  2,859
  3,004
  3,157
  3,317
  3,485
  3,661
  3,846
  4,040
Total cash flow (excl. dividends), $m
  721
  1,140
  1,958
  2,039
  2,123
  2,212
  2,304
  2,402
  2,504
  2,611
  2,723
  2,738
  2,862
  2,991
  3,127
  3,270
  3,420
  3,577
  3,742
  3,916
  4,098
  4,289
  4,489
  4,700
  4,921
  5,153
  5,396
  5,652
  5,920
  6,202
  6,498
Retained Cash Flow (-), $m
  352
  -805
  -105
  -112
  -118
  -125
  -132
  -140
  -148
  -156
  -164
  -173
  -182
  -192
  -202
  -213
  -224
  -235
  -247
  -260
  -274
  -288
  -302
  -318
  -334
  -351
  -369
  -387
  -407
  -427
  -449
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  335
  1,852
  1,927
  2,005
  2,086
  2,172
  2,262
  2,356
  2,455
  2,559
  2,565
  2,679
  2,799
  2,925
  3,058
  3,196
  3,342
  3,495
  3,655
  3,824
  4,001
  4,187
  4,382
  4,587
  4,802
  5,028
  5,265
  5,514
  5,775
  6,050
Discount rate, %
 
  10.20
  10.71
  11.25
  11.81
  12.40
  13.02
  13.67
  14.35
  15.07
  15.82
  16.61
  17.45
  18.32
  19.23
  20.20
  21.21
  22.27
  23.38
  24.55
  25.77
  27.06
  28.42
  29.84
  31.33
  32.90
  34.54
  36.27
  38.08
  39.99
  41.98
PV of cash for distribution, $m
 
  304
  1,511
  1,400
  1,283
  1,163
  1,042
  923
  806
  694
  589
  473
  389
  314
  249
  194
  147
  110
  80
  56
  39
  26
  17
  11
  7
  4
  2
  1
  1
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Alliance Data Systems Corporation 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.

FINANCIAL RATIOS  of  Alliance Data Systems (ADS)

Valuation Ratios
P/E Ratio 30.4
Price to Sales 1.8
Price to Book 7.9
Price to Tangible Book
Price to Cash Flow 6.3
Price to Free Cash Flow 7
Growth Rates
Sales Growth Rate 10.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 7.8%
Cap. Spend. - 3 Yr. Gr. Rate 8.9%
Financial Strength
Quick Ratio 1
Current Ratio 0.1
LT Debt to Equity 608.9%
Total Debt to Equity 756.9%
Interest Coverage 3
Management Effectiveness
Return On Assets 2.9%
Ret/ On Assets - 3 Yr. Avg. 3.4%
Return On Total Capital 3.1%
Ret/ On T. Cap. - 3 Yr. Avg. 4.1%
Return On Equity 23.6%
Return On Equity - 3 Yr. Avg. 26.3%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 40.1%
Gross Margin - 3 Yr. Avg. 40.1%
EBITDA Margin 24.6%
EBITDA Margin - 3 Yr. Avg. 25.8%
Operating Margin 17.7%
Oper. Margin - 3 Yr. Avg. 19.3%
Pre-Tax Margin 11.7%
Pre-Tax Margin - 3 Yr. Avg. 14%
Net Profit Margin 6.1%
Net Profit Margin - 3 Yr. Avg. 8%
Effective Tax Rate 38.1%
Eff/ Tax Rate - 3 Yr. Avg. 37.2%
Payout Ratio 6.9%

ADS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ADS stock intrinsic value calculation we used $7138 million for the last fiscal year's total revenue generated by Alliance Data Systems. The default revenue input number comes from 2016 income statement of Alliance Data Systems. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ADS stock valuation model: a) initial revenue growth rate of 4.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 10.2%, whose default value for ADS is calculated based on our internal credit rating of Alliance Data Systems, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Alliance Data Systems.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ADS stock the variable cost ratio is equal to 80.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for ADS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Alliance Data Systems.

Corporate tax rate of 27% is the nominal tax rate for Alliance Data Systems. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ADS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ADS are equal to 23.6%.

Life of production assets of 10.7 years is the average useful life of capital assets used in Alliance Data Systems operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ADS is equal to 50%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1658 million for Alliance Data Systems - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 55.265 million for Alliance Data Systems is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Alliance Data Systems at the current share price and the inputted number of shares is $12.6 billion.

Management's discussion and analysis

We are a leading global provider of data-driven marketing and loyalty solutions serving large, consumer-based businesses in a variety of industries. We offer a comprehensive 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. We focus on facilitating and managing interactions between our clients and their customers through all consumer marketing channels, including in-store, online, email, social media, mobile, direct mail and telephone. We capture and analyze data created during each customer interaction, leveraging the insight derived from that data to enable clients to identify and acquire new customers and to enhance customer loyalty. We believe that our services are more valued as businesses shift marketing resources away from traditional mass marketing toward targeted marketing programs that provide measurable returns on marketing investments. We operate in the following reportable segments: LoyaltyOne, Epsilon, and Card Services.

2016 Highlights and Recent Developments

 

·

 

Total revenue increased 11% to $7.1 billion in 2016 compared to $6.4 billion in 2015.

 

·

 

Adjusted EBITDA, net increased 9% to $1.9 billion in 2016 compared to $1.7 billion in 2015.

 

·

 

We repurchased approximately 3.8 million shares for $805.7 million in 2016.

 

·

 

We acquired 10% ownership interest in BrandLoyalty Group B.V., or BrandLoyalty, for approximately $102.0 million, which brought our ownership interest to 80%, effective January 1, 2016. We acquired the remaining 20% ownership interest in BrandLoyalty for approximately $258.8 million, which brought our ownership interest to 100%, effective April 1, 2016.

 

·

 

We purchased five credit card portfolios for total consideration paid of $1.0 billion.

 

·

 

We sold three private label credit card portfolios for total consideration received of $486.0 million.

 

·

 

In October 2016, our Board of Directors voted to expand the size of the Board to nine directors and appointed Timothy J. Theriault as a director.

 

·

 

We paid a quarterly dividend of $30.0 million, or $0.52 per share, in December 2016.

 

·

 

In December 2016, we cancelled the AIR MILES Reward Program’s five-year expiry policy due to the anticipated adoption of a new law in Ontario, Canada.

LoyaltyOne

LoyaltyOne generates revenue primarily from our coalition and short-term loyalty programs through our AIR MILES Reward Program and BrandLoyalty.

Revenue for the LoyaltyOne segment decreased 1% to $1.3 billion and adjusted EBITDA, net increased 14% to $308.9 million for the year ended December 31, 2016, in each case as compared to the prior year. Adjusted EBITDA, net excludes the impact of expiry. Revenue from our coalition loyalty program was impacted by a change in estimate of our breakage rate, discussed further below, offset in part by a 60% increase in the number of AIR MILES reward miles redeemed, as redemption activity accelerated due to the upcoming year-end expiration date. Revenue from our short-term loyalty programs increased 8% in part due to expansion into new markets. Adjusted EBITDA, net was positively impacted by the increases in revenue discussed above and our additional ownership interest in BrandLoyalty from 70% to 80% on January 1, 2016 and further to 100% on April 1, 2016. 

Our short-term loyalty programs have continued their expansion into North America in 2016 with the announcement of BrandLoyalty’s signing of Lowes Foods, a regional U.S. supermarket chain. As part of this agreement, BrandLoyalty will manage a promotional campaign in 75 Lowes Foods stores in North Carolina, South Carolina and Virginia.

During the year ended December 31, 2016, we announced an expansion of our relationship with Sobeys to begin issuing AIR MILES reward miles at Needs Convenience and Sobeys express convenience store locations in all Atlantic-

Canadian provinces. In addition, we announced the signing of a new multi-year agreement with Morrisons, a U.K. grocer, to provide analytics support and consulting services.

For the AIR MILES Reward Program, AIR MILES reward miles issued and AIR MILES reward miles redeemed are the two primary drivers of revenue and indicators of success of the program. The number of AIR MILES reward miles issued impacts future revenue recognized with respect to the number of AIR MILES reward miles redeemed and the amount of breakage for those AIR MILES reward miles expected to remain unredeemed.

AIR MILES reward miles issued during the year ended December 31, 2016 increased 1% as compared to the year ended December 31, 2015. Issuance, in particular during the fourth quarter of 2016, slowed as promotional activity by our sponsors lessened due to the negative media attention surrounding expiry. For 2017, we expect approximately 3% issuance growth. AIR MILES reward miles redeemed increased 60% during the year ended December 31, 2016, as collectors redeemed their AIR MILES reward miles in advance of the expiry policy under which AIR MILES reward miles older than five years were expected to expire effective December 31, 2016. We expect AIR MILES reward miles redeemed to lessen in 2017 and more closely resemble historical trends. AIR MILES reward miles collected in the AIR MILES Cash program option represented approximately 24% of the AIR MILES reward miles issued and 17% of the AIR MILES reward miles redeemed for 2016.

In the fourth quarter of 2016, a Private Member’s Public Bill was initially introduced to the Ontario Legislature that would prohibit the expiry of miles. On December 5, 2016, the Ontario Legislature passed Bill 47, Protecting Rewards Points Act (“Bill 47”), which amended Ontario's Consumer Protection Act, 2002 (the “Ontario Consumer Protection Act”) with respect to rewards points. Changes to the Ontario Consumer Protection Act affected by these amendments include, among other things:

 

·

 

changing the definition of “consumer agreement” to include agreements under which a supplier agrees to provide rewards points to a consumer; 

 

·

 

changing the definition of “supplier” to include a person who supplies rewards points;

 

·

 

prohibiting suppliers from entering into or amending consumer agreements to provide for the expiry of rewards points due to the passage of time alone; 

 

·

 

permitting the expiry of rewards points if a consumer agreement under which rewards points are provided is terminated by the supplier or the consumer and the consumer agreement provides for the expiry of the points;

 

·

 

permitting future regulation regarding rewards points; and

 

·

 

addressing transitional and other related matters.

These amendments to the Ontario Consumer Protection Act became effective upon receipt of Royal Assent on December 8, 2016. We currently anticipate that similar legislation may be enacted in some or all other Canadian provinces.

On December 1, 2016, with anticipated passage of the then-pending legislative changes in Ontario and the likelihood of changes in similar laws in some or all other Canadian provinces, LoyaltyOne cancelled its five-year expiry policy, which was implemented by our AIR MILES Reward Program on December 31, 2011 and expected to take effect on December 31, 2016. As a result of the cancellation of the expiry policy, coupled with increased redemption activity in the third and fourth quarter of 2016, we changed our estimate of breakage from 26% to 20%. As a result of this change in estimate, we increased the deferred redemption liability by $284.5 million with a corresponding reduction of redemption revenue. Of that, we estimated $241.7 million was attributable to the cancellation of the expiry policy.

Epsilon

Epsilon is a leading marketing services firm providing end-to-end, integrated marketing solutions that leverage rich data, analytics, creativity and technology to help clients more effectively acquire, retain and grow relationships with their customers. Services include strategic consulting, customer database technologies, omnichannel marketing, loyalty management, proprietary data, predictive modeling, permission-based email marketing, personalized digital marketing and a full range of direct and digital agency services.

Revenue increased 1% to $2.2 billion and adjusted EBITDA, net decreased 6% to $480.2 million for the year ended December 31, 2016 as compared to the prior year. Digital and technology platforms revenue increased 7%, driven by strength in CRM services and our automotive vertical. These strengths were offset in part by weakness in our agency offerings, specifically in the telecommunications, consumer packaged goods and retail verticals. Adjusted EBITDA was negatively impacted by increased payroll costs for the year ended December 31, 2016. For 2017, we expect revenue and adjusted EBITDA to grow approximately 4%.

During the year ended December 31, 2016, we announced the signing of new multi-year agreements with the following clients:

 

·

 

Lamps Plus, a national lighting retailer, to provide targeted email marketing services;

 

·

 

Amica Mutual Insurance Company, a national insurer, to provide targeted email marketing services;

 

·

 

Shire plc, a global biotechnology company, to build and host a database platform and provide database marketing services;

 

·

 

Del Monte Foods, a national food producer and distributor, to develop a multi-channel creative campaign and communications plan and provide marketing services; in addition, Epsilon was named the agency of record;

 

·

 

Brookdale Senior Living, a national provider of senior living communities, to provide strategic creative, account management and analytics services;

 

·

 

CNO Financial Group, Inc., a national holding company to insurers, to build a database platform and provide database marketing services;

 

·

 

Red Roof, a leading economy hotel chain in the United States, to provide email services; and

 

·

 

Gemological Institute of America, an independent nonprofit organization recognized as the world’s foremost authority in gemology, to develop an integrated campaign to increase consumer awareness; in addition, Epsilon was named the agency of record.

Further, we announced the signing of a new expanded agreement with Road Scholar, a not-for-profit educational organization, to provide digital advertising services in addition to the consumer database marketing services currently provided.

Card Services

Card Services provides risk management solutions, account origination, funding services, transaction processing, marketing, customer care and collection services for our more than 160 private label retail and co-brand credit card programs.

Revenue, generated primarily from finance charges and late fees as well as other servicing fees, increased 24% to $3.7 billion and adjusted EBITDA, net increased 14% to $1.2 billion for the year ended December 31, 2016 as compared to the prior year. These increases were driven by higher average credit card and loan receivables. Credit sales and average credit card and loan receivables increased 18% and 24%, respectively, for the year ended December 31, 2016 as compared to the prior year as a result of recent client signings and credit card portfolio acquisitions. For 2017, we expect credit card and loan receivables to grow approximately 15%, gross yields to remain stable, and adjusted EBITDA, net to increase 8% to 10%.

Delinquency rates were 4.8% of principal credit card and loan receivables at December 31, 2016 as compared to 4.2% at December 31, 2015. The principal net charge-off rate was 5.1% for the year ended December 31, 2016 as compared to 4.5% for the year ended December 31, 2015. For the year ended December 31, 2017, we expect our charge-off rate to be in the mid-5% range.

[Source: Form 10-K dated 2017-02-27]

RELATED COMPANIES Price Int.Val. Rating
AXP American Expre 91.96 40.98  str.sell
MA Mastercard 146.22 132.40  hold
GDOT Green Dot Cl A 53.76 21.03  str.sell
ATLC Atlanticus Hol 2.25 0.11  str.sell
DST DST Systems 55.40 1,343.78  str.buy

COMPANY NEWS

▶ NCAA Bribery Scandal Raises Stakes for Adidas   [01:17PM  Bloomberg Video]
▶ [$$] A Surprise Bump in Bad Card Loans   [12:44AM  The Wall Street Journal]
▶ [$$] A Surprise Bump in Bad Card Loans   [05:30AM  The Wall Street Journal]
▶ Switching Costs Dig Moat for Alliance Data Systems   [Aug-23-17 07:00AM  Morningstar]
▶ Market Downturn Opens Up 2 Big Opportunities   [Aug-21-17 11:15AM  GuruFocus.com]
▶ Why Adidas Is Crushing the Competition   [01:35PM  Bloomberg Video]
▶ Adidas scores Major League Soccer deal worth $700M   [Aug-02-17 12:59PM  Yahoo Finance Video]
▶ Alliance Data: Time to Get Back on Board   [07:00AM  TheStreet.com]
▶ The Market In 5 Minutes   [09:22AM  Benzinga]
▶ Alliance Data beats 2Q profit forecasts   [12:35AM  Associated Press]
▶ The Biggest Loser: Alliance Data Systems Tumbles 9.5%   [Jul-20-17 04:23PM  Barrons.com]
▶ These 2 Dow Stocks Are In Buy Zones Ahead Of Earnings   [Jul-17-17 04:12PM  Investor's Business Daily]
▶ Growing Competition Will Continue to Hurt Fitbit   [Jun-28-17 04:00PM  GuruFocus.com]
▶ Is Anything Safe from the Retail Rout?   [10:17AM  Barrons.com]
▶ This Is Why Nike Just Decided to Lay Off a Ton of People   [Jun-15-17 08:20PM  TheStreet.com]
Financial statements of ADS
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

FREE DOWNLOAD
Follow us on:   twitter   twitter   twitter   twitter

VALUATION THEORY       ASSET ALLOCATION

About X-FIN       Site news       Privacy policy       Terms of use       FAQ

Copyright © X-FIN.com 2005-2017. All rigths reserved.