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Why Is Alliance Data (ADS) Down 3.5% Since the Last Earnings Report?

Zacks Equity Research
Updated

It has been about a month since the last earnings report for Alliance Data Systems Corporation ADS. Shares have lost about 3.5% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Alliance Data Q3 Earnings Top, Rise Y/Y, View Intact

Alliance Data’s operating earnings of $5.35 per share in the third quarter of 2017 marginally surpassed the Zacks Consensus Estimate of $5.03. Earnings improved 12.9% year over year.

Card Service segment continues to post better results. However, LoyaltyOne and Epsilon were soft in the third quarter.

Behind the Headlines

Alliance Data’s revenues came in at $1.91 billion, up 1% year over year. The top line missed the Zacks Consensus Estimate by 3.2%.

Operating expenses decreased 2.1% year over year to $1.4 billion, primarily on the back of lower provision for loan losses. Operating income rallied 13.7% year over year to $478.9 million.

Adjusted EBITDA climbed 10% year over year to $622 million.

Segment Update

LoyaltyOne: Revenues totaled $305 million, down 20% year over year. Adjusted EBITDA declined 26% to $61 million. AIR MILES’ reward miles issued decreased 7% while AIR MILES’ reward miles redeemed slumped 43%.
    
Epsilon: Revenues were $559 million in the quarter, up 3% year over year. Adjusted EBITDA decreased 7% year over year to $125 million due to an unfavorable revenue mix toward lower margin product offerings.

Card Services: Revenues came in at $1.1 billion, up 9% year over year. Adjusted EBITDA was $397 million, up 20% year over year. Average credit card receivables, excluding amounts reclassified as assets held for sale, increased 14% year over year to $15.9 billion. Net principal loss rates for the reported quarter were 5.5%, up 80 basis points year over year.

Financial Update

As of Sep 30, 2017, cash and cash equivalents were $3.3 billion compared with $1.8 billion as of Dec 31, 2016.

At the end of the quarter, debt rose 10.7% from 2016-end to $6.2 billion.

Capital expenditure at Alliance Data grew 11.6% year over year to $176.6 million in the first nine months of 2017.

Guidance

Alliance Data affirmed 2017 core earnings at $18.10 per share on revenues at $7.8 billion. While the bottom line is expected to rise 7%, the top line is likely to improve 9%.  

For 2018, the company expects core EPS of $21.50 on revenues of $8.7 billion. While the bottom line is projected to rally 19%, the top line is estimated to climb 12%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower. In the past month, the consensus estimate has shifted lower by 7.2%.

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Alliance Data Systems Corporation Price and Consensus

 

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

VGM Scores

At this time, Alliance Data's stock has a nice Growth Score of B, though it is lagging a lot on the momentum front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.


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