Intrinsic value of Alliance Data Systems - ADS

Previous Close

$178.17

  Intrinsic Value

$381.15

stock screener

  Rating & Target

str. buy

+114%

Previous close

$178.17

 
Intrinsic value

$381.15

 
Up/down potential

+114%

 
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 0001), $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 9.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  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
  4.87
  4.89
  4.90
  4.91
  4.92
  4.92
  4.93
  4.94
  4.95
  4.95
  4.96
  4.96
  4.96
  4.97
  4.97
  4.97
  4.98
Revenue, $m
  8,067
  8,434
  8,821
  9,230
  9,661
  10,116
  10,595
  11,099
  11,630
  12,189
  12,778
  13,397
  14,047
  14,732
  15,452
  16,208
  17,004
  17,840
  18,718
  19,642
  20,612
  21,631
  22,702
  23,827
  25,009
  26,250
  27,554
  28,924
  30,363
  31,874
Variable operating expenses, $m
  2,778
  2,883
  2,994
  3,111
  3,235
  3,365
  3,502
  3,647
  3,799
  3,959
  3,659
  3,836
  4,023
  4,219
  4,425
  4,641
  4,869
  5,109
  5,360
  5,625
  5,902
  6,194
  6,501
  6,823
  7,162
  7,517
  7,891
  8,283
  8,695
  9,127
Fixed operating expenses, $m
  3,550
  3,629
  3,708
  3,790
  3,873
  3,959
  4,046
  4,135
  4,226
  4,319
  4,414
  4,511
  4,610
  4,711
  4,815
  4,921
  5,029
  5,140
  5,253
  5,368
  5,487
  5,607
  5,731
  5,857
  5,986
  6,117
  6,252
  6,389
  6,530
  6,674
Total operating expenses, $m
  6,328
  6,512
  6,702
  6,901
  7,108
  7,324
  7,548
  7,782
  8,025
  8,278
  8,073
  8,347
  8,633
  8,930
  9,240
  9,562
  9,898
  10,249
  10,613
  10,993
  11,389
  11,801
  12,232
  12,680
  13,148
  13,634
  14,143
  14,672
  15,225
  15,801
Operating income, $m
  1,738
  1,922
  2,119
  2,329
  2,553
  2,793
  3,047
  3,318
  3,606
  3,912
  4,705
  5,050
  5,415
  5,802
  6,212
  6,646
  7,105
  7,591
  8,105
  8,649
  9,223
  9,829
  10,470
  11,147
  11,862
  12,616
  13,412
  14,252
  15,138
  16,073
EBITDA, $m
  2,497
  2,694
  2,904
  3,129
  3,369
  3,625
  3,897
  4,186
  4,493
  4,819
  5,165
  5,532
  5,920
  6,332
  6,768
  7,229
  7,717
  8,233
  8,779
  9,355
  9,964
  10,608
  11,287
  12,004
  12,762
  13,560
  14,403
  15,293
  16,231
  17,220
Interest expense (income), $m
  405
  804
  171
  210
  251
  293
  339
  386
  436
  489
  545
  603
  665
  730
  798
  870
  945
  1,024
  1,108
  1,195
  1,287
  1,384
  1,485
  1,592
  1,704
  1,822
  1,946
  2,076
  2,213
  2,356
  2,507
Earnings before tax, $m
  934
  1,751
  1,909
  2,079
  2,260
  2,454
  2,661
  2,882
  3,117
  3,367
  4,102
  4,385
  4,685
  5,004
  5,342
  5,701
  6,081
  6,484
  6,910
  7,361
  7,839
  8,344
  8,878
  9,443
  10,039
  10,670
  11,336
  12,039
  12,782
  13,566
Tax expense, $m
  252
  473
  515
  561
  610
  663
  719
  778
  842
  909
  1,107
  1,184
  1,265
  1,351
  1,442
  1,539
  1,642
  1,751
  1,866
  1,988
  2,117
  2,253
  2,397
  2,550
  2,711
  2,881
  3,061
  3,251
  3,451
  3,663
Net income, $m
  682
  1,278
  1,393
  1,517
  1,650
  1,791
  1,943
  2,104
  2,276
  2,458
  2,994
  3,201
  3,420
  3,653
  3,900
  4,162
  4,439
  4,733
  5,044
  5,374
  5,722
  6,091
  6,481
  6,893
  7,329
  7,789
  8,275
  8,789
  9,331
  9,903

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
  17,385
  18,176
  19,012
  19,893
  20,822
  21,802
  22,834
  23,921
  25,066
  26,270
  27,538
  28,872
  30,275
  31,750
  33,301
  34,932
  36,646
  38,448
  40,341
  42,331
  44,422
  46,619
  48,927
  51,351
  53,898
  56,574
  59,384
  62,336
  65,437
  68,693
Adjusted assets (=assets-cash), $m
  17,385
  18,176
  19,012
  19,893
  20,822
  21,802
  22,834
  23,921
  25,066
  26,270
  27,538
  28,872
  30,275
  31,750
  33,301
  34,932
  36,646
  38,448
  40,341
  42,331
  44,422
  46,619
  48,927
  51,351
  53,898
  56,574
  59,384
  62,336
  65,437
  68,693
Revenue / Adjusted assets
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
  0.464
Average production assets, $m
  3,106
  3,247
  3,396
  3,554
  3,720
  3,895
  4,079
  4,273
  4,478
  4,693
  4,919
  5,158
  5,408
  5,672
  5,949
  6,240
  6,546
  6,868
  7,207
  7,562
  7,936
  8,328
  8,740
  9,173
  9,628
  10,106
  10,608
  11,136
  11,690
  12,271
Working capital, $m
  -6,978
  -7,295
  -7,630
  -7,984
  -8,357
  -8,750
  -9,165
  -9,601
  -10,060
  -10,544
  -11,053
  -11,588
  -12,151
  -12,743
  -13,366
  -14,020
  -14,708
  -15,431
  -16,191
  -16,990
  -17,829
  -18,711
  -19,637
  -20,610
  -21,633
  -22,707
  -23,835
  -25,019
  -26,264
  -27,571
Total debt, $m
  3,175
  3,887
  4,639
  5,432
  6,269
  7,150
  8,079
  9,058
  10,088
  11,172
  12,313
  13,513
  14,776
  16,103
  17,500
  18,967
  20,510
  22,132
  23,836
  25,627
  27,508
  29,485
  31,563
  33,745
  36,037
  38,445
  40,975
  43,631
  46,422
  49,353
Total liabilities, $m
  15,647
  16,359
  17,110
  17,904
  18,740
  19,622
  20,551
  21,529
  22,559
  23,643
  24,784
  25,985
  27,247
  28,575
  29,971
  31,439
  32,981
  34,603
  36,307
  38,098
  39,980
  41,957
  44,034
  46,216
  48,509
  50,917
  53,446
  56,103
  58,893
  61,824
Total equity, $m
  1,739
  1,818
  1,901
  1,989
  2,082
  2,180
  2,283
  2,392
  2,507
  2,627
  2,754
  2,887
  3,027
  3,175
  3,330
  3,493
  3,665
  3,845
  4,034
  4,233
  4,442
  4,662
  4,893
  5,135
  5,390
  5,657
  5,938
  6,234
  6,544
  6,869
Total liabilities and equity, $m
  17,386
  18,177
  19,011
  19,893
  20,822
  21,802
  22,834
  23,921
  25,066
  26,270
  27,538
  28,872
  30,274
  31,750
  33,301
  34,932
  36,646
  38,448
  40,341
  42,331
  44,422
  46,619
  48,927
  51,351
  53,899
  56,574
  59,384
  62,337
  65,437
  68,693
Debt-to-equity ratio
  1.830
  2.140
  2.440
  2.730
  3.010
  3.280
  3.540
  3.790
  4.020
  4.250
  4.470
  4.680
  4.880
  5.070
  5.250
  5.430
  5.600
  5.760
  5.910
  6.050
  6.190
  6.320
  6.450
  6.570
  6.690
  6.800
  6.900
  7.000
  7.090
  7.180
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
  682
  1,278
  1,393
  1,517
  1,650
  1,791
  1,943
  2,104
  2,276
  2,458
  2,994
  3,201
  3,420
  3,653
  3,900
  4,162
  4,439
  4,733
  5,044
  5,374
  5,722
  6,091
  6,481
  6,893
  7,329
  7,789
  8,275
  8,789
  9,331
  9,903
Depreciation, amort., depletion, $m
  758
  772
  785
  800
  816
  832
  849
  867
  887
  907
  460
  482
  505
  530
  556
  583
  612
  642
  674
  707
  742
  778
  817
  857
  900
  945
  991
  1,041
  1,092
  1,147
Funds from operations, $m
  1,440
  2,049
  2,179
  2,318
  2,466
  2,624
  2,792
  2,971
  3,162
  3,365
  3,454
  3,683
  3,926
  4,183
  4,456
  4,745
  5,051
  5,375
  5,718
  6,081
  6,464
  6,869
  7,298
  7,751
  8,229
  8,734
  9,267
  9,829
  10,423
  11,050
Change in working capital, $m
  -300
  -317
  -335
  -354
  -373
  -393
  -414
  -436
  -459
  -484
  -509
  -535
  -563
  -592
  -623
  -655
  -688
  -723
  -760
  -799
  -839
  -882
  -926
  -973
  -1,022
  -1,074
  -1,128
  -1,185
  -1,244
  -1,307
Cash from operations, $m
  1,741
  2,367
  2,514
  2,671
  2,839
  3,017
  3,206
  3,408
  3,621
  3,848
  3,963
  4,218
  4,489
  4,775
  5,078
  5,399
  5,739
  6,098
  6,478
  6,879
  7,303
  7,751
  8,224
  8,724
  9,251
  9,807
  10,395
  11,014
  11,668
  12,357
Maintenance CAPEX, $m
  -278
  -290
  -303
  -317
  -332
  -348
  -364
  -381
  -399
  -418
  -439
  -460
  -482
  -505
  -530
  -556
  -583
  -612
  -642
  -674
  -707
  -742
  -778
  -817
  -857
  -900
  -945
  -991
  -1,041
  -1,092
New CAPEX, $m
  -135
  -141
  -149
  -157
  -166
  -175
  -184
  -194
  -204
  -215
  -226
  -238
  -251
  -264
  -277
  -291
  -306
  -322
  -338
  -355
  -374
  -392
  -412
  -433
  -455
  -478
  -502
  -527
  -554
  -582
Cash from investing activities, $m
  -413
  -431
  -452
  -474
  -498
  -523
  -548
  -575
  -603
  -633
  -665
  -698
  -733
  -769
  -807
  -847
  -889
  -934
  -980
  -1,029
  -1,081
  -1,134
  -1,190
  -1,250
  -1,312
  -1,378
  -1,447
  -1,518
  -1,595
  -1,674
Free cash flow, $m
  1,329
  1,935
  2,062
  2,196
  2,340
  2,494
  2,658
  2,832
  3,018
  3,215
  3,298
  3,520
  3,756
  4,006
  4,271
  4,552
  4,850
  5,165
  5,498
  5,850
  6,223
  6,617
  7,034
  7,474
  7,939
  8,430
  8,948
  9,495
  10,073
  10,683
Issuance/(repayment) of debt, $m
  -11,712
  712
  752
  793
  836
  882
  929
  978
  1,030
  1,084
  1,141
  1,200
  1,263
  1,328
  1,396
  1,468
  1,543
  1,622
  1,704
  1,791
  1,882
  1,977
  2,077
  2,182
  2,292
  2,408
  2,529
  2,657
  2,790
  2,931
Issuance/(repurchase) of shares, $m
  11,765
  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  
  53
  712
  752
  793
  836
  882
  929
  978
  1,030
  1,084
  1,141
  1,200
  1,263
  1,328
  1,396
  1,468
  1,543
  1,622
  1,704
  1,791
  1,882
  1,977
  2,077
  2,182
  2,292
  2,408
  2,529
  2,657
  2,790
  2,931
Total cash flow (excl. dividends), $m
  1,382
  2,647
  2,813
  2,990
  3,177
  3,376
  3,587
  3,811
  4,048
  4,299
  4,439
  4,720
  5,019
  5,334
  5,667
  6,020
  6,392
  6,786
  7,202
  7,641
  8,105
  8,594
  9,111
  9,656
  10,231
  10,838
  11,477
  12,152
  12,864
  13,614
Retained Cash Flow (-), $m
  -12,447
  -79
  -84
  -88
  -93
  -98
  -103
  -109
  -114
  -120
  -127
  -133
  -140
  -148
  -155
  -163
  -171
  -180
  -189
  -199
  -209
  -220
  -231
  -242
  -255
  -268
  -281
  -295
  -310
  -326
Prev. year cash balance distribution, $m
  12,564
  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
  1,499
  2,568
  2,730
  2,901
  3,084
  3,278
  3,484
  3,702
  3,933
  4,179
  4,312
  4,587
  4,878
  5,186
  5,512
  5,857
  6,221
  6,606
  7,013
  7,442
  7,896
  8,375
  8,880
  9,413
  9,976
  10,570
  11,196
  11,857
  12,554
  13,288
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
  1,437
  2,351
  2,376
  2,389
  2,390
  2,379
  2,353
  2,314
  2,259
  2,191
  2,048
  1,957
  1,855
  1,741
  1,618
  1,488
  1,354
  1,217
  1,080
  946
  817
  695
  582
  479
  388
  308
  240
  183
  137
  100
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 23.7
Price to Sales 1.4
Price to Book 6.2
Price to Tangible Book
Price to Cash Flow 4.9
Price to Free Cash Flow 5.4
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 $7719.4 million for the last fiscal year's total revenue generated by Alliance Data Systems. The default revenue input number comes from 0001 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 4.5% 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 34.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $3474 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 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 38.5%.

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 -86.5%. 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 - $1855.3 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 54.944 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 $9.8 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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