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Alliance Data Systems Corporation Analysis – October 2015 Update $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 10 Most Undervalued Companies for the Defensive Investor – September 2015.  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 stock analysis showing a specific look at how Alliance Data Systems Corporation (ADS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Alliance Data Systems Corporation is a provider of data-driven marketing and loyalty solutions serving consumer-based businesses in a variety of industries. The Company operates through three segments: LoyaltyOne, which includes the Company’s Canadian AIR MILES Reward Program and BrandLoyalty; Epsilon, which provides direct marketing solutions, and Private Label Services and Credit, 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. 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.


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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.


Downloadable PDF version of this valuation:

ModernGraham Valuation of ADS – October 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $16,446,003,591 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.20 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 286.99% Pass
6. Moderate PEmg Ratio PEmg < 20 30.54 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 8.69 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.20 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.13 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

ADS value Chart October 2015

EPSmg $8.95
MG Growth Estimate 15.00%
MG Value $344.58
Opinion Fairly Valued
MG Value based on 3% Growth $129.78
MG Value based on 0% Growth $76.08
Market Implied Growth Rate 11.02%
Current Price $273.30
% of Intrinsic Value 79.32%

Alliance Data Systems Corporation does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the lack of dividends, and the high PEmg and PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the net current assets and the lack of dividends.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.75 in 2011 to an estimated $8.95 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 11.02% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

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 Corporation (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.

Stage 3: Information for Further Research

ADS Charts October 2015

Net Current Asset Value (NCAV) -$67.89
Graham Number $94.03
PEmg 30.54
Current Ratio 2.20
PB Ratio 8.69
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0



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Most Recent Balance Sheet Figures

Total Current Assets $13,357,110,000
Total Current Liabilities $6,073,751,000
Long-Term Debt $8,222,425,000
Total Assets $19,547,440,000
Intangible Assets $5,150,645,000
Total Liabilities $17,588,290,000
Shares Outstanding (Diluted Average) 62,325,000

Earnings Per Share History

Next Fiscal Year Estimate $12.38
Dec14 $7.87
Dec13 $7.42
Dec12 $6.58
Dec11 $5.45
Dec10 $3.48
Dec09 $2.49
Dec08 $2.80
Dec07 $2.03
Dec06 $2.32
Dec05 $1.64
Dec04 $1.22
Dec03 $0.84
Dec02 $0.31
Dec01 -$0.21
Dec00 -$0.60
Dec99 -$0.70
Dec98 -$0.43

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $8.95
Dec14 $6.88
Dec13 $5.95
Dec12 $4.86
Dec11 $3.75
Dec10 $2.81
Dec09 $2.40
Dec08 $2.24
Dec07 $1.84
Dec06 $1.59
Dec05 $1.07
Dec04 $0.62
Dec03 $0.19
Dec02 -$0.19
Dec01 -$0.43
Dec00 -$0.47
Dec99 -$0.35

Recommended Reading:

Other ModernGraham posts about the company

14 Companies in the Spotlight This Week – 10/11/14
Alliance Data Systems Annual Stock Valuation – 2014 $ADS
10 Companies in the Spotlight This Week – 7/12/14
14 Companies in the Spotlight This Week – 4/12/14
Alliance Data Systems (ADS) Quarterly Valuation – April 2014

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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