Should Value Investors Consider Alliance Data Systems (ADS)?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Alliance Data Systems Corporation ADS stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Alliance Data Systems has a trailing twelve months PE ratio of 15.35, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 22.19. If we focus on the long-term PE trend, Alliance Data Systems’ current PE level puts it below its midpoint of 20.63 over the past five years. Moreover, the current level stands significantly lower than the highs for the stock, suggesting that it could be a solid entry point.

Further, the stock’s PE compares favorably with the Zacks Business Services sector’s trailing twelve months PE ratio, which stands at 26.10. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
 

We should also point out that Alliance Data Systems has a forward PE ratio (price relative to this year’s earnings) of just 11.89, so it is fair to say that a slightly more value-oriented path may be ahead for Alliance Data Systems stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Alliance Data Systems has a P/S ratio of about 1.93. This is much lower than the S&P 500 average, which comes in at 3.52 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.

If anything, ADS is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, Alliance Data Systems currently has a Value Score of A, putting it into the top 20% of all stocks we cover from this look. This makes Alliance Data Systems a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Alliance Data Systems is just 0.88, a level that is far lower than the industry average of 1.77. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Additionally, its P/CF ratio (another great indicator of value) comes in at 10.01, which is far better than the industry average of 18.81. Clearly, ADS is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Alliance Data Systems might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth Score of B and a Momentum Score of A. This gives ADS a Zacks VGM score — or its overarching fundamental grade — of A. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been somewhat discouraging. The current quarter has seen one estimate go lower in the past sixty days compared to no upward revisions, while the full year estimate has seen one upward and downward revision each in the same time period.

This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has dropped by 0.2% in the past two months, while the full year estimate has inched lower by 0.1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Alliance Data Systems Corporation Price and Consensus
 

Alliance Data Systems Corporation Price and Consensus | Alliance Data Systems Corporation Quote

Owing to this somewhat bearish trend, the stock has just a Zacks Rank #3 (Hold), which is why we are looking for in-line performance from the company in the near term.

Bottom Line

Alliance Data Systems is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Despite carrying a Zacks Rank #3, the company enjoys a solid Zacks Industry Rank (among top 39% of more than 250 industries), which hints at favorable broader factors. In fact, over the past two years, the industry has clearly outperformed the broader market, as you can see below:

So, value investors might want to wait for estimates to turn around in this name first, but once that happens, this stock could be a compelling pick.

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