Intrinsic value of Alliance Data Systems - ADS

Previous Close

$234.00

  Intrinsic Value

$124.45

stock screener

  Rating & Target

sell

-47%

Previous close

$234.00

 
Intrinsic value

$124.45

 
Up/down potential

-47%

 
Rating

sell

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 13.0

 

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
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  7,138
  7,281
  7,448
  7,640
  7,855
  8,093
  8,354
  8,638
  8,946
  9,278
  9,634
  10,015
  10,422
  10,854
  11,314
  11,802
  12,320
  12,867
  13,446
  14,058
  14,704
  15,385
  16,104
  16,862
  17,660
  18,501
  19,386
  20,318
  21,298
  22,330
  23,415
Variable operating expenses, $m
 
  5,846
  5,972
  6,116
  6,277
  6,456
  6,652
  6,865
  7,097
  7,346
  7,613
  7,519
  7,824
  8,149
  8,494
  8,861
  9,249
  9,660
  10,095
  10,554
  11,039
  11,551
  12,090
  12,659
  13,258
  13,890
  14,554
  15,254
  15,990
  16,764
  17,579
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
  5,846
  5,972
  6,116
  6,277
  6,456
  6,652
  6,865
  7,097
  7,346
  7,613
  7,519
  7,824
  8,149
  8,494
  8,861
  9,249
  9,660
  10,095
  10,554
  11,039
  11,551
  12,090
  12,659
  13,258
  13,890
  14,554
  15,254
  15,990
  16,764
  17,579
Operating income, $m
  1,266
  1,435
  1,476
  1,524
  1,578
  1,637
  1,702
  1,773
  1,850
  1,932
  2,021
  2,496
  2,598
  2,705
  2,820
  2,942
  3,071
  3,207
  3,351
  3,504
  3,665
  3,835
  4,014
  4,203
  4,402
  4,611
  4,832
  5,064
  5,309
  5,566
  5,836
EBITDA, $m
  1,778
  1,975
  2,021
  2,073
  2,131
  2,196
  2,266
  2,344
  2,427
  2,517
  2,614
  2,717
  2,827
  2,945
  3,070
  3,202
  3,342
  3,491
  3,648
  3,814
  3,989
  4,174
  4,369
  4,575
  4,791
  5,019
  5,260
  5,512
  5,778
  6,058
  6,353
Interest expense (income), $m
  405
  668
  657
  675
  695
  717
  742
  769
  799
  831
  866
  903
  943
  985
  1,030
  1,078
  1,129
  1,183
  1,240
  1,300
  1,364
  1,432
  1,503
  1,578
  1,657
  1,740
  1,828
  1,920
  2,017
  2,119
  2,227
Earnings before tax, $m
  837
  767
  819
  849
  883
  920
  960
  1,004
  1,051
  1,101
  1,156
  1,593
  1,655
  1,720
  1,790
  1,864
  1,942
  2,024
  2,111
  2,203
  2,301
  2,403
  2,511
  2,625
  2,745
  2,871
  3,004
  3,144
  3,291
  3,446
  3,609
Tax expense, $m
  319
  207
  221
  229
  238
  248
  259
  271
  284
  297
  312
  430
  447
  465
  483
  503
  524
  547
  570
  595
  621
  649
  678
  709
  741
  775
  811
  849
  889
  930
  974
Net income, $m
  432
  560
  598
  620
  644
  671
  701
  733
  767
  804
  844
  1,163
  1,208
  1,256
  1,307
  1,360
  1,417
  1,478
  1,541
  1,609
  1,679
  1,754
  1,833
  1,916
  2,004
  2,096
  2,193
  2,295
  2,403
  2,516
  2,635

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
  24,108
  24,663
  25,297
  26,008
  26,797
  27,662
  28,604
  29,624
  30,723
  31,902
  33,163
  34,509
  35,942
  37,465
  39,081
  40,794
  42,607
  44,524
  46,550
  48,688
  50,945
  53,325
  55,834
  58,477
  61,261
  64,192
  67,277
  70,524
  73,939
  77,532
Adjusted assets (=assets-cash), $m
  23,655
  24,108
  24,663
  25,297
  26,008
  26,797
  27,662
  28,604
  29,624
  30,723
  31,902
  33,163
  34,509
  35,942
  37,465
  39,081
  40,794
  42,607
  44,524
  46,550
  48,688
  50,945
  53,325
  55,834
  58,477
  61,261
  64,192
  67,277
  70,524
  73,939
  77,532
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
  1,718
  1,758
  1,803
  1,854
  1,910
  1,972
  2,039
  2,111
  2,190
  2,274
  2,364
  2,460
  2,562
  2,670
  2,785
  2,907
  3,037
  3,173
  3,318
  3,470
  3,631
  3,801
  3,979
  4,168
  4,366
  4,575
  4,795
  5,026
  5,270
  5,526
Working capital, $m
  10,359
  3,640
  3,724
  3,820
  3,927
  4,046
  4,177
  4,319
  4,473
  4,639
  4,817
  5,008
  5,211
  5,427
  5,657
  5,901
  6,160
  6,434
  6,723
  7,029
  7,352
  7,693
  8,052
  8,431
  8,830
  9,250
  9,693
  10,159
  10,649
  11,165
  11,707
Total debt, $m
  20,941
  18,783
  19,282
  19,852
  20,493
  21,202
  21,981
  22,829
  23,747
  24,735
  25,796
  26,932
  28,143
  29,433
  30,803
  32,258
  33,799
  35,431
  37,156
  38,980
  40,905
  42,936
  45,078
  47,336
  49,714
  52,220
  54,858
  57,635
  60,557
  63,630
  66,864
Total liabilities, $m
  23,856
  21,698
  22,197
  22,767
  23,408
  24,117
  24,896
  25,744
  26,662
  27,650
  28,711
  29,847
  31,058
  32,348
  33,718
  35,173
  36,714
  38,346
  40,071
  41,895
  43,820
  45,851
  47,993
  50,251
  52,629
  55,135
  57,773
  60,550
  63,472
  66,545
  69,779
Total equity, $m
  1,658
  2,411
  2,466
  2,530
  2,601
  2,680
  2,766
  2,860
  2,962
  3,072
  3,190
  3,316
  3,451
  3,594
  3,746
  3,908
  4,079
  4,261
  4,452
  4,655
  4,869
  5,095
  5,333
  5,583
  5,848
  6,126
  6,419
  6,728
  7,052
  7,394
  7,753
Total liabilities and equity, $m
  25,514
  24,109
  24,663
  25,297
  26,009
  26,797
  27,662
  28,604
  29,624
  30,722
  31,901
  33,163
  34,509
  35,942
  37,464
  39,081
  40,793
  42,607
  44,523
  46,550
  48,689
  50,946
  53,326
  55,834
  58,477
  61,261
  64,192
  67,278
  70,524
  73,939
  77,532
Debt-to-equity ratio
  12.630
  7.790
  7.820
  7.850
  7.880
  7.910
  7.950
  7.980
  8.020
  8.050
  8.090
  8.120
  8.160
  8.190
  8.220
  8.250
  8.290
  8.320
  8.350
  8.370
  8.400
  8.430
  8.450
  8.480
  8.500
  8.520
  8.550
  8.570
  8.590
  8.610
  8.620
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
  560
  598
  620
  644
  671
  701
  733
  767
  804
  844
  1,163
  1,208
  1,256
  1,307
  1,360
  1,417
  1,478
  1,541
  1,609
  1,679
  1,754
  1,833
  1,916
  2,004
  2,096
  2,193
  2,295
  2,403
  2,516
  2,635
Depreciation, amort., depletion, $m
  512
  541
  544
  549
  553
  559
  564
  571
  577
  585
  593
  221
  230
  239
  250
  260
  272
  284
  297
  310
  324
  339
  355
  372
  390
  408
  428
  448
  470
  493
  516
Funds from operations, $m
  1,841
  1,100
  1,142
  1,169
  1,198
  1,230
  1,265
  1,303
  1,345
  1,389
  1,436
  1,384
  1,438
  1,495
  1,556
  1,621
  1,689
  1,761
  1,838
  1,919
  2,004
  2,094
  2,188
  2,288
  2,393
  2,504
  2,621
  2,743
  2,872
  3,008
  3,151
Change in working capital, $m
  -247
  71
  84
  96
  107
  119
  131
  142
  154
  166
  178
  190
  203
  216
  230
  244
  259
  274
  289
  306
  323
  341
  359
  379
  399
  420
  443
  466
  490
  516
  542
Cash from operations, $m
  2,088
  1,029
  1,059
  1,073
  1,090
  1,111
  1,135
  1,161
  1,191
  1,223
  1,258
  1,194
  1,235
  1,279
  1,326
  1,377
  1,431
  1,488
  1,548
  1,613
  1,681
  1,753
  1,829
  1,909
  1,994
  2,084
  2,178
  2,278
  2,382
  2,492
  2,609
Maintenance CAPEX, $m
  0
  -157
  -161
  -164
  -169
  -173
  -178
  -184
  -191
  -197
  -205
  -212
  -221
  -230
  -239
  -250
  -260
  -272
  -284
  -297
  -310
  -324
  -339
  -355
  -372
  -390
  -408
  -428
  -448
  -470
  -493
New CAPEX, $m
  -207
  -33
  -40
  -45
  -51
  -56
  -62
  -67
  -73
  -78
  -84
  -90
  -96
  -102
  -109
  -115
  -122
  -129
  -137
  -144
  -152
  -161
  -170
  -179
  -188
  -198
  -209
  -220
  -231
  -243
  -256
Cash from investing activities, $m
  -4,063
  -190
  -201
  -209
  -220
  -229
  -240
  -251
  -264
  -275
  -289
  -302
  -317
  -332
  -348
  -365
  -382
  -401
  -421
  -441
  -462
  -485
  -509
  -534
  -560
  -588
  -617
  -648
  -679
  -713
  -749
Free cash flow, $m
  -1,975
  838
  858
  863
  871
  882
  894
  910
  927
  947
  969
  891
  918
  947
  978
  1,012
  1,048
  1,087
  1,128
  1,172
  1,218
  1,268
  1,320
  1,375
  1,434
  1,496
  1,561
  1,630
  1,703
  1,779
  1,860
Issuance/(repayment) of debt, $m
  3,865
  -299
  499
  570
  640
  710
  779
  848
  918
  989
  1,061
  1,135
  1,211
  1,290
  1,371
  1,455
  1,541
  1,632
  1,725
  1,823
  1,925
  2,031
  2,142
  2,258
  2,379
  2,506
  2,638
  2,777
  2,922
  3,074
  3,233
Issuance/(repurchase) of shares, $m
  -780
  193
  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
  -106
  499
  570
  640
  710
  779
  848
  918
  989
  1,061
  1,135
  1,211
  1,290
  1,371
  1,455
  1,541
  1,632
  1,725
  1,823
  1,925
  2,031
  2,142
  2,258
  2,379
  2,506
  2,638
  2,777
  2,922
  3,074
  3,233
Total cash flow (excl. dividends), $m
  721
  732
  1,357
  1,434
  1,512
  1,591
  1,673
  1,758
  1,845
  1,936
  2,031
  2,026
  2,129
  2,237
  2,349
  2,467
  2,590
  2,718
  2,853
  2,995
  3,143
  3,299
  3,462
  3,633
  3,813
  4,001
  4,199
  4,407
  4,625
  4,853
  5,093
Retained Cash Flow (-), $m
  352
  -753
  -55
  -63
  -71
  -79
  -87
  -94
  -102
  -110
  -118
  -126
  -135
  -143
  -152
  -162
  -171
  -181
  -192
  -203
  -214
  -226
  -238
  -251
  -264
  -278
  -293
  -309
  -325
  -342
  -359
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
 
  -21
  1,302
  1,370
  1,440
  1,512
  1,587
  1,663
  1,743
  1,826
  1,913
  1,900
  1,995
  2,093
  2,197
  2,305
  2,418
  2,537
  2,662
  2,792
  2,929
  3,073
  3,224
  3,382
  3,549
  3,723
  3,906
  4,098
  4,300
  4,512
  4,734
Discount rate, %
 
  12.30
  12.92
  13.56
  14.24
  14.95
  15.70
  16.48
  17.31
  18.17
  19.08
  20.04
  21.04
  22.09
  23.19
  24.35
  25.57
  26.85
  28.19
  29.60
  31.08
  32.64
  34.27
  35.98
  37.78
  39.67
  41.65
  43.73
  45.92
  48.22
  50.63
PV of cash for distribution, $m
 
  -19
  1,021
  936
  846
  753
  661
  572
  486
  406
  334
  255
  202
  156
  118
  88
  63
  45
  30
  20
  13
  8
  5
  3
  2
  1
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5
  98.5

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 31.1
Price to Sales 1.9
Price to Book 8.1
Price to Tangible Book
Price to Cash Flow 6.4
Price to Free Cash Flow 7.1
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 0
Current Ratio 0.1
LT Debt to Equity 833.2%
Total Debt to Equity 1263%
Interest Coverage 3
Management Effectiveness
Return On Assets 2.9%
Ret/ On Assets - 3 Yr. Avg. 3.4%
Return On Total Capital 2.1%
Ret/ On T. Cap. - 3 Yr. Avg. 2.9%
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 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 12.3%, 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 55.479 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 $13.0 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]

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Financial statements of ADS
Valuation of Stocks

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