Alliance Data Systems Quarterly Valuation – July 2014 $ADS

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Alliance Data Systems (ADS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Alliance Data Systems Corporation is a provider of transaction-based, data-driven marketing and loyalty solutions serving consumer-based businesses in a variety of industries. The Company offers a portfolio of integrated outsourced marketing solutions, including customer loyalty programs, database marketing services, marketing strategy consulting, analytics and creative services, direct marketing services and private label and co-brand retail credit card programs. It focuses on facilitating and managing interactions between its clients and their customers through all consumer marketing channels, including in-store, on-line, catalog, mail, telephone and email, and emerging channels, such as mobile and social media. Its products and services operate under three segments: LoyaltyOne, Epsilon and Private Label Services and Credit. ADS Chart

ADS data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $284.80
MG Value $312.18
MG Opinion Fairly Valued
Value Based on 3% Growth $117.58
Value Based on 0% Growth $68.92
Market Implied Growth Rate 13.31%
Net Current Asset Value (NCAV) -$52.53
PEmg 35.12
Current Ratio 2.51
PB Ratio 16.38

Balance Sheet – 3/31/2014

Current Assets $9,938,000,000
Current Liabilities $3,965,300,000
Total Debt $6,497,200,000
Total Assets $13,757,300,000
Intangible Assets $3,136,400,000
Total Liabilities $12,807,400,000
Outstanding Shares 54,620,000

Earnings Per Share

2014 (estimate) $11.56
2013 $7.42
2012 $6.58
2011 $5.45
2010 $3.51
2009 $3.06
2008 $3.31
2007 $2.03
2006 $2.32
2005 $1.64
2004 $1.22

Earnings Per Share – ModernGraham

2014 (estimate) $8.11
2013 $5.99
2012 $4.98
2011 $3.94
2010 $3.07
2009 $2.73


Alliance Data Systems qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the lack of dividend payments and the high PEmg and PB ratios. The Enterprising Investor’s only concern is the lack of dividend payments. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.07 in 2010 to an estimated $8.11 for 2014. This strong level of demonstrated growth supports the market’s implied estimate of 13.31% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

Be sure to check out the previous ModernGraham valuations of Alliance Data Systems (ADS) for more perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Alliance Data Systems (ADS)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Alliance Data Systems (ADS) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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