More Gains in the Cards for ADS

05/01/2012 12:35 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The leading private-label card issuer and direct marketer is delivering the goods, while its steadily climbing stock remains a bargain, writes senior editor Igor Greenwald.

Treacherous times like these demand not just good stocks, but great stocks. We need growth and value and, ideally, something that’s been popular of late…but not scalding hot.

As you know, it’s May, and so we’ve been told ad nauseam to go away, after the first not-great month in the last four. And though the entire market sells at just 14 times apparently bulletproof earnings, and might just be taking a hard-earned rest, we’ve almost tricked our worried selves into stuffing cash under the mattress.

I took this problem to the stock screener over at, and it turns out there’s at least one name out there worth investing in. Actually, my screen returned ten names based on the following metrics:

  • Revenue growth of 20% in the most recent quarter
  • A forward price-to-earnings ratio below 15
  • A price-to-free cash flow ratio below ten
  • Price above the 200-day, 50-day, and 20-day simple moving averages
  • Relative strength index below 60 (described by finviz as “not overbought”)

I would have asked for a pony as well, but a deep-pocketed private equity group paid a 30% premium to ride it straight to the glue factory.

Old friend CF Holdings (CF) was one of the names to pop up on the screen, but I’ve already discussed its advantages. Today, I want to focus on another stock that made the cut: store credit-card and loyalty program marketer Alliance Data Systems (ADS).

It was put together by a private equity group in 1996, via a merger of J.C. Penney’s (JCP) transaction processing subsidiary and The Limited’s private-label credit-card bank.
Private-label credit cards remain Alliance Data’s main moneymaker, accounting for just under half of revenue, and Limited Brands (LTD) cards still provide 18% of the business in that segment. But ADS has also branched out to run Canada’s largest air miles customer loyalty rewards scheme, as well as Epsilon, which specializes in e-mail marketing. Each of those units brings in just over a quarter of corporate revenue.

E-mail marketing and data analytics have become fashionable with speculators of late—witness the success of such recent initial public offerings as Exact Target (ET) and Splunk (SPLK). The latter helps companies mine every byte that travels through their computer systems for nuggets of potentially useful data.

Exact Target is an e-mail marketer more comparable to Epsilon. Over the last 12 months, Exact Target had less than a quarter of Epsilon’s revenue, but it now boasts more than a quarter of the valuation—not just of Epsilon but of the entire Alliance Data Systems. (Which didn’t stop several analysts from heartily recommending ET this morning.)

Still, shed no tears for ADS. The stock has been on a relentless march from less than $24 a share at the market bottom in 2009 to the recent record high of $130. It’s up 24% year-to-date and 39% from its late-November low.

Quarterly results reported two weeks ago showed a 20% sales gain (boosted a bit by an acquisition). Net income rose 33%, and what the company considers “core earnings” rose 30%. Income per share was up a mere 19%, because of dilution with “phantom shares” tied top convertible debt maturing over the next two years. These shares don’t represent an economic claim on earnings, and in the meantime are masking Alliance’s earnings gains.

The gains are coming from the accelerated spending within Alliance’s private-label card portfolio, alongside sharply diminished credit losses. Changes in the Canadian loyalty program’s redemption terms may have provided a temporary boost, while Epsilon continues to be pitched as a story for 2013 and beyond.

The company comfortably topped profit and revenue estimates, and is forecasting a further 22% core earnings gain this year. Several analysts subsequently boosted their price targets into the $145 to $150 range, though nine of the 20 following the stock still rate it as only a Hold.

The private-label cards business figures to remain a real cash cow as consumer spending and borrowing recovers from the Great Recession. And Alliance’s close relationship with many of the leading retail chains should give its budding data-analytics business a leg up against more specialized competitors.

As for Canadians, they’re a good bet to continue earning and cashing miles no matter what happens to global growth.

Add it all up and you have an inexpensive stock and a company growing fast in a promising field where it already has scale and plenty of sales leads among its current customers.

It’s probably best not to stuff that mattress with cash just yet, while stocks like this are still around.

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