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Alliance Data (ADS) Up 42% YTD: Can it Retain the Momentum?

Zacks Equity Research
·4 min read

Shares of Alliance Data Systems Corporation ADS have rallied 42.2% year to date compared with the industry's and the Business Service sector’s growth of 1.4%. The Zacks S&P 500 composite has gained 13.3% in the said time frame. With a market capitalization of $5.2 billion, average volume of shares traded in the last three months was 0.8 million.

A well performing, high return on equity (ROI) Card Service segment, solid inorganic background, and strong balance sheet should continue to drive Alliance Data. The company has a solid track record of beating earnings estimates in the last four reported quarters, with the average being 45.08%.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

ROI of 50.5% in the trailing 12 months was better than the industry average of 25.6%, reflecting the company’s efficiency in utilizing shareholders’ fund. The company targets mid-to-high 20s ROE in the long term.

The Zacks Consensus Estimate for 2021 and 2022 earnings has moved up 31.5% and 8.4%, respectively in the past 60 days, reflecting analysts’ optimism.

More Upside Left?

The Zacks Consensus Estimate for 2021 indicates a year-over-year increase of 69.3%. The expected long term earnings growth is pegged at 18.4%. It has an impressive Growth Score of A. This style score analyzes the growth prospects of a company.

Its Card Service segment should continue to benefit from recovery of in-store sales performance, coupled with continued strength of digital spending. It estimates Alliance Data credit sales to increase at a high single- to low-double-digit rate, with net loss rate below 6% in 2021 and in the mid-to-upper 5% range in the second quarter of 2021.

Alliance Data projects high single-digit to low double-digit card receivables growth as it enters 2022. It aims high single-digit annual receivable growth exceeding $20 million in 2023.

Looking to become a leading payment and lending solutions business, this Zacks Rank #3 (Hold) private label credit card processing company for mid-market specialty retail stores in the United Stated decided to spin off its LoyaltyOne segment. This segment provides coalition and short-term loyalty programs through its Canadian AIR MILES Reward Program and BrandLoyalty. Alliance Data will retain nearly 19% of the shares of Spinco (LoyaltyOne after spin off) following the spin off, with the intent to monetize that stake to provide for incremental corporate debt reduction at Alliance Data.

The company has an impressive inorganic growth story. Acquisitions have helped the company expand international footprint, consolidate its position in digital agency, strengthen its position in the digital marketing channels, and expand its Omni-Channel distribution capabilities. Its recent Bread buyout expanded its digital offerings.

It boasts a strong balance sheet by virtue of its solid cash position and lowered debt. With solid financial strength and flexibility, it pursues growth opportunities and engages in effective capital deployment.

Alliance Data has an impressive VGM Score of A. This helps to identify stocks with the most attractive value, growth and momentum.

Stocks to Consider

Some better-ranked stocks from the business service sector are Evertec, Inc. EVTC, Avis Budget Group CAR and Harsco Corporation HSC, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Evertec delivered an earnings surprise of 14.81% in the last reported quarter.

Avis Budget delivered an earnings surprise of 80.67% in the last reported quarter.

Harsco delivered an earnings surprise of 200.00% in the last reported quarter.

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