Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Alliance Data Systems fares in the ModernGraham valuation model.
ADS data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - FAIL
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$86.86|
|Value Based on 0% Growth||$50.92|
|Market Implied Growth Rate||17.68%|
|Net Current Asset Value (NCAV)||-$38.56|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Alliance Data Systems qualifies for the Enterprising Investor but not the Defensive Investor, due to the lack of a dividend payment and the high PEmg and PB ratios. For the Enterprising Investor, the only requirement the company doesn't meet is the dividend payment. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to some competitors through a review of ModernGraham's valuation of American Express (NYSE:AXP) and a look at 5 Outstanding Dow Components.
As for a valuation, the company appears to be overvalued despite growing its EPSmg (normalized earnings) from $2.73 in 2009 to a whopping $5.99 for 2013. While this level of demonstrated growth is outstanding, the market's implied estimate is of 17.68% earnings growth, which is above ModernGraham's margin of safety when it comes to estimating a growth rate. As a result, the ModernGraham valuation model returns an estimate of intrinsic value that falls below the current price.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Alliance Data Systems? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Alliance Data Systems (NYSE:ADS) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.