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Alliance Data Systems Corp Valuation – May 2018 $ADS

Company Profile (excerpt from Reuters): Alliance Data Systems Corporation, incorporated on February 23, 1995, 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. Its client base is diversified across a range of end-markets, including financial services, specialty retail, grocery and drugstore chains, petroleum retail, automotive, hospitality and travel, telecommunications, insurance and healthcare.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ADS – May 2018

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 $11,540,981,778 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.14 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 279.51% Pass
6. Moderate PEmg Ratio PEmg < 20 14.72 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.83 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 2.14 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.91 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $14.23
MG Growth Estimate 15.00%
MG Value $547.96
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $206.37
MG Value based on 0% Growth $120.98
Market Implied Growth Rate 3.11%
Current Price $209.45
% of Intrinsic Value 38.22%

Alliance Data Systems Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PB ratio. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $6.88 in 2014 to an estimated $14.23 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.11% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Alliance Data Systems Corporation revealed the company was trading above its Graham Number of $128.46. The company pays a dividend of $2.08 per share, for a yield of 1% Its PEmg (price over earnings per share – ModernGraham) was 14.72, which was below the industry average of 33.86, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-70.39.

Alliance Data Systems Corporation performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$70.39
Graham Number $128.46
PEmg 14.72
Current Ratio 2.14
PB Ratio 5.83
Current Dividend $2.08
Dividend Yield 0.99%
Number of Consecutive Years of Dividend Growth 2

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $23,470,500,000
Total Current Liabilities $10,985,500,000
Long-Term Debt $11,362,100,000
Total Assets $29,392,900,000
Intangible Assets $4,630,400,000
Total Liabilities $27,391,500,000
Shares Outstanding (Diluted Average) 55,700,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $21.90
Dec2017 $14.10
Dec2016 $7.34
Dec2015 $8.85
Dec2014 $7.87
Dec2013 $7.42
Dec2012 $6.58
Dec2011 $5.45
Dec2010 $3.48
Dec2009 $2.49
Dec2008 $2.80
Dec2007 $2.03
Dec2006 $2.32
Dec2005 $1.64
Dec2004 $1.22
Dec2003 $0.84
Dec2002 $0.31
Dec2001 -$0.21
Dec2000 -$0.60
Dec1999 -$0.70
Dec1998 -$0.43

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $14.23
Dec2017 $9.97
Dec2016 $7.81
Dec2015 $7.77
Dec2014 $6.88
Dec2013 $5.95
Dec2012 $4.86
Dec2011 $3.75
Dec2010 $2.81
Dec2009 $2.40
Dec2008 $2.24
Dec2007 $1.84
Dec2006 $1.59
Dec2005 $1.07
Dec2004 $0.62
Dec2003 $0.19
Dec2002 -$0.19

Recommended Reading:

Other ModernGraham posts about the company

14 Best Stocks for Value Investors This Week – 2/11/17
Alliance Data Systems Corp Valuation – February 2017 $ADS
Alliance Data Systems Corporation Analysis – October 2015 Update $ADS
14 Companies in the Spotlight This Week – 10/11/14
Alliance Data Systems Annual Stock Valuation – 2014 $ADS

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Disclaimer:

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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