Intrinsic value of Alliance Data Systems - ADS

Previous Close

$238.03

  Intrinsic Value

$475.67

stock screener

  Rating & Target

str. buy

+100%

Previous close

$238.03

 
Intrinsic value

$475.67

 
Up/down potential

+100%

 
Rating

str. buy

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 2017), $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 13.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   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
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  8.10
  7.79
  7.51
  7.26
  7.03
  6.83
  6.65
  6.48
  6.33
  6.20
  6.08
  5.97
  5.88
  5.79
  5.71
  5.64
  5.57
  5.52
  5.47
  5.42
  5.38
  5.34
  5.31
  5.27
  5.25
  5.22
  5.20
  5.18
  5.16
  5.15
Revenue, $m
  8,344
  8,994
  9,670
  10,372
  11,101
  11,860
  12,648
  13,468
  14,321
  15,209
  16,134
  17,098
  18,102
  19,150
  20,243
  21,385
  22,577
  23,822
  25,124
  26,486
  27,910
  29,400
  30,960
  32,593
  34,303
  36,094
  37,971
  39,938
  42,000
  44,162
Variable operating expenses, $m
  2,849
  3,035
  3,227
  3,428
  3,636
  3,852
  4,077
  4,311
  4,555
  4,808
  4,604
  4,879
  5,166
  5,465
  5,777
  6,102
  6,442
  6,798
  7,169
  7,558
  7,964
  8,389
  8,835
  9,301
  9,789
  10,300
  10,835
  11,397
  11,985
  12,602
Fixed operating expenses, $m
  3,551
  3,630
  3,709
  3,791
  3,874
  3,960
  4,047
  4,136
  4,227
  4,320
  4,415
  4,512
  4,611
  4,713
  4,816
  4,922
  5,031
  5,141
  5,254
  5,370
  5,488
  5,609
  5,732
  5,858
  5,987
  6,119
  6,254
  6,391
  6,532
  6,675
Total operating expenses, $m
  6,400
  6,665
  6,936
  7,219
  7,510
  7,812
  8,124
  8,447
  8,782
  9,128
  9,019
  9,391
  9,777
  10,178
  10,593
  11,024
  11,473
  11,939
  12,423
  12,928
  13,452
  13,998
  14,567
  15,159
  15,776
  16,419
  17,089
  17,788
  18,517
  19,277
Operating income, $m
  1,944
  2,330
  2,733
  3,153
  3,591
  4,048
  4,524
  5,021
  5,540
  6,081
  7,115
  7,707
  8,325
  8,973
  9,650
  10,360
  11,104
  11,883
  12,700
  13,558
  14,457
  15,402
  16,393
  17,434
  18,527
  19,676
  20,882
  22,151
  23,483
  24,884
EBITDA, $m
  2,989
  3,420
  3,870
  4,339
  4,827
  5,336
  5,867
  6,421
  6,999
  7,602
  8,232
  8,890
  9,578
  10,298
  11,051
  11,840
  12,666
  13,532
  14,439
  15,391
  16,389
  17,436
  18,535
  19,689
  20,901
  22,173
  23,510
  24,914
  26,390
  27,940
Interest expense (income), $m
  405
  724
  199
  273
  350
  430
  514
  600
  690
  784
  881
  982
  1,088
  1,198
  1,312
  1,432
  1,557
  1,687
  1,823
  1,965
  2,113
  2,269
  2,431
  2,601
  2,779
  2,965
  3,161
  3,365
  3,579
  3,803
  4,039
Earnings before tax, $m
  1,219
  2,131
  2,460
  2,803
  3,161
  3,534
  3,924
  4,331
  4,756
  5,200
  6,133
  6,619
  7,128
  7,660
  8,219
  8,804
  9,417
  10,060
  10,736
  11,444
  12,189
  12,970
  13,792
  14,655
  15,562
  16,515
  17,518
  18,572
  19,680
  20,846
Tax expense, $m
  329
  575
  664
  757
  853
  954
  1,059
  1,169
  1,284
  1,404
  1,656
  1,787
  1,924
  2,068
  2,219
  2,377
  2,543
  2,716
  2,899
  3,090
  3,291
  3,502
  3,724
  3,957
  4,202
  4,459
  4,730
  5,014
  5,314
  5,628
Net income, $m
  890
  1,556
  1,796
  2,046
  2,307
  2,580
  2,864
  3,162
  3,472
  3,796
  4,477
  4,832
  5,203
  5,592
  6,000
  6,427
  6,874
  7,344
  7,837
  8,354
  8,898
  9,468
  10,068
  10,698
  11,360
  12,056
  12,788
  13,557
  14,366
  15,217

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  19,587
  21,113
  22,699
  24,347
  26,060
  27,840
  29,690
  31,615
  33,618
  35,702
  37,873
  40,135
  42,493
  44,953
  47,519
  50,199
  52,997
  55,921
  58,977
  62,173
  65,516
  69,014
  72,675
  76,509
  80,523
  84,729
  89,135
  93,752
  98,592
  103,666
Adjusted assets (=assets-cash), $m
  19,587
  21,113
  22,699
  24,347
  26,060
  27,840
  29,690
  31,615
  33,618
  35,702
  37,873
  40,135
  42,493
  44,953
  47,519
  50,199
  52,997
  55,921
  58,977
  62,173
  65,516
  69,014
  72,675
  76,509
  80,523
  84,729
  89,135
  93,752
  98,592
  103,666
Revenue / Adjusted assets
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
  0.426
Average production assets, $m
  5,774
  6,224
  6,692
  7,177
  7,682
  8,207
  8,752
  9,320
  9,910
  10,525
  11,165
  11,832
  12,527
  13,252
  14,008
  14,798
  15,623
  16,485
  17,386
  18,328
  19,314
  20,345
  21,424
  22,554
  23,738
  24,977
  26,276
  27,637
  29,064
  30,560
Working capital, $m
  -451
  -486
  -522
  -560
  -599
  -640
  -683
  -727
  -773
  -821
  -871
  -923
  -978
  -1,034
  -1,093
  -1,155
  -1,219
  -1,286
  -1,357
  -1,430
  -1,507
  -1,588
  -1,672
  -1,760
  -1,852
  -1,949
  -2,050
  -2,157
  -2,268
  -2,385
Total debt, $m
  3,686
  5,059
  6,486
  7,969
  9,511
  11,113
  12,778
  14,511
  16,313
  18,189
  20,143
  22,179
  24,301
  26,515
  28,825
  31,236
  33,754
  36,386
  39,136
  42,013
  45,021
  48,170
  51,465
  54,915
  58,528
  62,313
  66,278
  70,434
  74,790
  79,356
Total liabilities, $m
  17,629
  19,002
  20,429
  21,912
  23,454
  25,056
  26,721
  28,453
  30,256
  32,132
  34,086
  36,122
  38,244
  40,458
  42,767
  45,179
  47,697
  50,329
  53,079
  55,956
  58,964
  62,112
  65,408
  68,858
  72,471
  76,256
  80,221
  84,377
  88,733
  93,299
Total equity, $m
  1,959
  2,111
  2,270
  2,435
  2,606
  2,784
  2,969
  3,161
  3,362
  3,570
  3,787
  4,014
  4,249
  4,495
  4,752
  5,020
  5,300
  5,592
  5,898
  6,217
  6,552
  6,901
  7,268
  7,651
  8,052
  8,473
  8,913
  9,375
  9,859
  10,367
Total liabilities and equity, $m
  19,588
  21,113
  22,699
  24,347
  26,060
  27,840
  29,690
  31,614
  33,618
  35,702
  37,873
  40,136
  42,493
  44,953
  47,519
  50,199
  52,997
  55,921
  58,977
  62,173
  65,516
  69,013
  72,676
  76,509
  80,523
  84,729
  89,134
  93,752
  98,592
  103,666
Debt-to-equity ratio
  1.880
  2.400
  2.860
  3.270
  3.650
  3.990
  4.300
  4.590
  4.850
  5.090
  5.320
  5.530
  5.720
  5.900
  6.070
  6.220
  6.370
  6.510
  6.640
  6.760
  6.870
  6.980
  7.080
  7.180
  7.270
  7.350
  7.440
  7.510
  7.590
  7.660
Adjusted equity ratio
  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
  890
  1,556
  1,796
  2,046
  2,307
  2,580
  2,864
  3,162
  3,472
  3,796
  4,477
  4,832
  5,203
  5,592
  6,000
  6,427
  6,874
  7,344
  7,837
  8,354
  8,898
  9,468
  10,068
  10,698
  11,360
  12,056
  12,788
  13,557
  14,366
  15,217
Depreciation, amort., depletion, $m
  1,046
  1,091
  1,137
  1,186
  1,236
  1,289
  1,343
  1,400
  1,459
  1,521
  1,116
  1,183
  1,253
  1,325
  1,401
  1,480
  1,562
  1,649
  1,739
  1,833
  1,931
  2,034
  2,142
  2,255
  2,374
  2,498
  2,628
  2,764
  2,906
  3,056
Funds from operations, $m
  1,936
  2,646
  2,933
  3,232
  3,544
  3,869
  4,208
  4,562
  4,931
  5,317
  5,594
  6,015
  6,456
  6,917
  7,400
  7,906
  8,437
  8,993
  9,576
  10,187
  10,829
  11,503
  12,210
  12,953
  13,734
  14,554
  15,415
  16,321
  17,273
  18,273
Change in working capital, $m
  -34
  -35
  -36
  -38
  -39
  -41
  -43
  -44
  -46
  -48
  -50
  -52
  -54
  -57
  -59
  -62
  -64
  -67
  -70
  -74
  -77
  -80
  -84
  -88
  -92
  -97
  -101
  -106
  -111
  -117
Cash from operations, $m
  1,969
  2,681
  2,969
  3,270
  3,583
  3,910
  4,250
  4,606
  4,977
  5,365
  5,643
  6,067
  6,510
  6,974
  7,459
  7,968
  8,501
  9,060
  9,646
  10,261
  10,906
  11,583
  12,295
  13,042
  13,826
  14,651
  15,517
  16,427
  17,384
  18,390
Maintenance CAPEX, $m
  -534
  -577
  -622
  -669
  -718
  -768
  -821
  -875
  -932
  -991
  -1,052
  -1,116
  -1,183
  -1,253
  -1,325
  -1,401
  -1,480
  -1,562
  -1,649
  -1,739
  -1,833
  -1,931
  -2,034
  -2,142
  -2,255
  -2,374
  -2,498
  -2,628
  -2,764
  -2,906
New CAPEX, $m
  -432
  -450
  -467
  -486
  -505
  -525
  -546
  -567
  -590
  -615
  -640
  -667
  -695
  -725
  -757
  -790
  -825
  -862
  -901
  -942
  -985
  -1,031
  -1,079
  -1,130
  -1,183
  -1,240
  -1,299
  -1,361
  -1,427
  -1,496
Cash from investing activities, $m
  -966
  -1,027
  -1,089
  -1,155
  -1,223
  -1,293
  -1,367
  -1,442
  -1,522
  -1,606
  -1,692
  -1,783
  -1,878
  -1,978
  -2,082
  -2,191
  -2,305
  -2,424
  -2,550
  -2,681
  -2,818
  -2,962
  -3,113
  -3,272
  -3,438
  -3,614
  -3,797
  -3,989
  -4,191
  -4,402
Free cash flow, $m
  1,003
  1,654
  1,879
  2,115
  2,360
  2,617
  2,884
  3,163
  3,455
  3,759
  3,951
  4,284
  4,632
  4,996
  5,378
  5,777
  6,196
  6,636
  7,096
  7,580
  8,088
  8,621
  9,181
  9,769
  10,387
  11,037
  11,720
  12,438
  13,194
  13,988
Issuance/(repayment) of debt, $m
  -9,730
  1,373
  1,427
  1,483
  1,541
  1,602
  1,666
  1,732
  1,802
  1,876
  1,954
  2,036
  2,122
  2,214
  2,310
  2,411
  2,518
  2,631
  2,751
  2,876
  3,009
  3,148
  3,295
  3,450
  3,613
  3,785
  3,966
  4,156
  4,356
  4,566
Issuance/(repurchase) of shares, $m
  10,307
  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  
  577
  1,373
  1,427
  1,483
  1,541
  1,602
  1,666
  1,732
  1,802
  1,876
  1,954
  2,036
  2,122
  2,214
  2,310
  2,411
  2,518
  2,631
  2,751
  2,876
  3,009
  3,148
  3,295
  3,450
  3,613
  3,785
  3,966
  4,156
  4,356
  4,566
Total cash flow (excl. dividends), $m
  1,580
  3,027
  3,307
  3,598
  3,902
  4,219
  4,550
  4,895
  5,257
  5,635
  5,905
  6,320
  6,754
  7,210
  7,687
  8,189
  8,715
  9,267
  9,847
  10,456
  11,096
  11,769
  12,476
  13,219
  14,000
  14,822
  15,686
  16,594
  17,549
  18,554
Retained Cash Flow (-), $m
  -11,197
  -153
  -159
  -165
  -171
  -178
  -185
  -192
  -200
  -208
  -217
  -226
  -236
  -246
  -257
  -268
  -280
  -292
  -306
  -320
  -334
  -350
  -366
  -383
  -401
  -421
  -441
  -462
  -484
  -507
Prev. year cash balance distribution, $m
  11,093
  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
  77
  83
  90
  97
  104
  111
  119
  126
  135
  143
  152
  161
  171
  181
  191
  202
  214
  226
  238
  251
  265
  279
  294
  310
  326
  343
  361
  380
  399
  420
Cash available for distribution, $m
  1,476
  2,875
  3,148
  3,433
  3,730
  4,041
  4,365
  4,703
  5,057
  5,427
  5,688
  6,093
  6,518
  6,964
  7,431
  7,921
  8,435
  8,975
  9,541
  10,137
  10,762
  11,419
  12,110
  12,836
  13,599
  14,401
  15,245
  16,132
  17,065
  18,047
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  1,415
  2,632
  2,740
  2,827
  2,892
  2,932
  2,949
  2,939
  2,905
  2,845
  2,701
  2,600
  2,478
  2,338
  2,182
  2,013
  1,835
  1,653
  1,469
  1,288
  1,113
  947
  794
  654
  529
  420
  327
  250
  186
  136
Current shareholders' claim on cash, %
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0

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 31.6
Price to Sales 1.9
Price to Book 8.2
Price to Tangible Book
Price to Cash Flow 6.5
Price to Free Cash Flow 7.3
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 $7719 million for the last fiscal year's total revenue generated by Alliance Data Systems. The default revenue input number comes from 2017 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 8.1% 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 4.3%, 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 34.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $3475 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 5.4% 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 1%.

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 69.2%.

Life of production assets of 10 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 -5.4%. 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 - $1855 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 56 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 $13.3 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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