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Why Alliance Data (ADS) Should Be in Your Portfolio

Zacks Equity Research
Updated

Alliance Data Systems Corporation ADS is poised to gain from opportunities from the current trend in consumer-based businesses, which are shifting their marketing expenditures to data-driven marketing strategies. Organic growth has been a pillar of improved revenues as indicated by the company’s revenue growth story that increased at a five-year CAGR of 18%.

Alliance Data depicts strength across all its segments. Management expects strong performance in BrandLoyalty in 2017, with about 10% top- and bottom-line growth. Epsilon remains well poised for growth stemming from favorable results in auto, CRM, and data. Management anticipates the segment to record about 4% growth in 2017 (revenues to be $2.24 billion and EBITDA to be $0.5 billion). Though management estimates card receivable growth to moderate in 2017 to 15% from 20% in 2016, new signings are likely to lead to $2-billion vintage in 2017.

Alliance Data’s inorganic story remains impressive with strategic buyouts of Aspen Marketing Holdings, Hyper Marketing group of companies, acquiring a majority ownership interest in the Netherlands-based BrandLoyalty Group B.V., Conversant Inc. and CBSM-Companhia Brasileira De Servicos De Marketing. These acquisitions have helped the Zacks Rank #3 (Hold) company expand globally and add capabilities to its compelling portfolio.

The company also engages in shareholders friendly moves. The board of directors approved a $500 million repurchase program in Jan 2017, of which it bought back $415 million worth shares in the first quarter itself. Alliance Data initiated a quarterly dividend in the fourth quarter, incorporating a major change in its shareholders return policy.

Valuation is also attractive at present as the stock is currently trading at a forward P/E of 13.6x, a 42% discount to the industry average of 23.6x. Though the price to book valuation multiple is expensive, Alliance Data has a trailing 12-month return on equity (ROE) of 57%, which is substantially higher than the industry average of 32.7%.

Shares of Alliance Data gained about 4.28% year to date. Though the company’s shares underperformed the Zacks categorized Financial Transaction Service industry’s growth of 14.75%, we believe that inorganic background, strengthening its balance sheet to gain financial flexibility and share buybacks bodes well for long-term growth and should drive the stock higher. The expected long-term earnings growth rate is currently pegged at 13.80%, better than the industry average of 12.40%.  

Though the Zacks Consensus Estimate moved down by a cent to $17.56 for 2017, the same increased 1.1% to $20.17 for 2018. The company also carries a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics.

Stocks to Consider

Some better ranked stocks from the financial transaction service industry are Total System Services Inc. TSS, Visa Inc. V and QIWI plc QIWI.

Qiwi plc, operates electronic online payment systems primarily in the Russian Federation, Kazakhstan, Moldova, Belarus, Romania, the United Arab Emirates and elsewhere. The company delivered a trailing four-quarter average positive earnings surprise of 23.61%. The stock sports Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Total System Services Inc. provides electronic payment processing, merchant services and related services to financial and non-financial institutions in the U.S. and internationally. The company delivered four quarter average surprise of 3.59%. The stock carries Zacks Rank #2 (Buy).

Visa Inc. operates retail electronic payments network worldwide. The company delivered a four-quarter average surprise of 7.24%. The stock carries Zacks Rank #2 (Buy).

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Zacks Investment Research