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Assessing Survival Potential: Alliance Data Systems

Harrison Schwartz profile picture
Harrison Schwartz


  • Credit card companies are likely to take a hit, not only due to a decline in retail sales but also an increase in loan losses.
  • Alliance Data Systems has a higher-than-normal delinquency rate of 6-7% that is likely to spike with unemployment.
  • It has struggled to keep up with the shift away from brick-and-mortar - a shift that is accelerating in today's environment.
  • The company has a tangible book value of about zero, so it lacks the financial wherewithal to handle a substantial increase in loan losses.
  • While the company appears cheap on a historical basis, its business model is not robust, so its survivability is uncertain.
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Alliance Data Systems (ADS) has taken a significant COVID-19 hit and remains nearly 60% below its March highs. The company provides loyalty credit card services to brick-and-mortar stores, as well as data analytics services. ADS has been struggling for years due to the decline of brick-and-mortar sales, and many fear that COVID-19 will be its final blow. Indeed, the data suggests that this is a possibility.

In 2015, the stock hit a peak price of $300. By January of this year, it had declined to $100 and has fallen 50% more since then. The revenue and assets have been in decline since then, and many analysts are looking for the bottom. Indeed, analysts may see a value opportunity. The stock's valuation is low with a TTM P/E of 12X and a price-to-cash flow of around 2X. The discrepancy can be attributed to loan loss provisions.

If we assume ADS's prospects will not continue to decline, it is clearly undervalued. However, COVID-19, as well as long-term factors, jeopardize its turnaround potential. As you'll see, the company does not have much room to handle a rise in charge-offs.

COVID-19 Measures and Credit Card Risks

COVID-19 has caused brick-and-mortar sales to decline dramatically. Many major retailers are closed or are seeing much lower traffic than normal. The company has made an effort to expand e-commerce operations, but the fact remains that brand loyalty is lower online, so loyalty-based credit cards are less viable.

Additionally, the value to customers of travel rewards is likely greatly diminished, meaning new customer growth will likely be very poor. In fact, credit card applications have already dropped by 40% during the virus, and it seems the trend will continue.

More worrisome is the likelihood of an increase in delinquencies. The company has allowed greater forbearance and is planning for

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This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

bbatts profile picture
Your reasoning for its possible failure is really thin. Delinquencies are part of the game. ADS knows this and is still in the black. The CEO has cracked the whip and cutting costs; including putting a pause on the dividend during this tough time. Their reliance on brick and mortar had already dropped below 25% of revenue. They are making the right moves. Finally, if ADS were to be failing, then explain to us why the Chief Account Officer and seven of their directors are ALL buying ADS (insider trading) stock on March 19th, 20th, 23rd and April 27th...after the COVID-19 crash. This is a great indication that they believe in the company. Being on the inside, they would know better than us outsiders looking in. I am long ADS.
value_vulture profile picture
Great point
@bbatts what's your target price on this one?
bbatts profile picture
@BorisSFL77 If they continue to be successful in their pivot away from brick-n-mortar and continue to grow their revenue and clientele on the e-commerce side, I see no reason why they cannot reach $250 and beyond within several years.
I think ADS is going to survive because the only big hit they are going to get is from Travel business. But their other clients are big retails shops. In Canada LCBO, Grocery Stores, Online Clothing stores are still making enough revenue.
Skaterdude profile picture
Some good points in the article. A couple of comments:

"However, state unemployment systems are already running out of funds and are now reliant on loans from the federal government."
Just heard a report that my state is good until July. And at that point, low-cost loans from the Federal government are available.

"With $17.36 billion in total delinquencies and receivables, it has had a delinquency rate of 7.4%, which is far higher than the national average of 2.6%."
I think this fails to recognize that ADS is not in the mainstream of credit cards lenders. It's more in the lower credit tier borrower business, like ENVA and SYF, which have delinquencies more in the 5% - 6% range. So 7.4% is not as bad as it seems, given its business segment.
Great article on ADS
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