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Aggressive Growth

Alliance Data Systems Corp (ADS - Analyst Report) Sales and earnings surprises have helped push ADS higher.

Company Description

Alliance Data Systems offers customer loyalty programs, database marketing services, marketing strategy consulting, analytics and creative services, permission-based e-mail marketing, credit card programs.

Earnings and Sales Surprises Help

ADS had a big beat last quarter, as the company reported earnings of $2.16 per share, well ahead of the Zacks Consensus Earnings Estimates of $1.78 per share. The stock moved up 5% as a result of the earnings but the move could have been higher. Company guidance for the following quarter came in a little light of expectations which may have depressed the stock reaction to such a big beat.

Earnings surprises for each of the last three reported quarters give us confidence that the company will continue the positive trend in the coming quarter. The last time the company missed was the September quarter of 2010. Despite the miss on earnings, the stock moved higher by 6% following the announcement.

Bottom line beats are what drive stocks, as earnings estimates are subsequently moved higher as a result. Top line beats are good as well, as it’s an indication the core business continues to grow. Without revenue growth, expenses have to move towards zero to see earnings growth. Thankfully, ADS has seen top line beats in its last six quarters.

Large Buyback will aid earnings

A $400 million buyback was announced in late December, replacing an existing buyback program that was slated to expire at the end of the year. The buyback will serve to lower the number of shares outstanding, or the divisor in the earning per share equation. That stated, the impact of a $400 million buyback on a $5 billion company is not going to be very significant in any single quarter.

Valuation

ADS is a key player in its industry and trades at a slight discount when looking at trailing twelve months PE. When looking forward, the company trades at a slight premium to the industry. Being a major player in the industry means the company will play a bigger role in the overall average. This is the case for ADS.

The Chart

ADS had a pretty good 2011, and more of the same is expected for 2012. Recent weakness in late November sent the stock down close to its 200 day moving average, but quickly bounced back. ADS is a Zacks #1 Rank (Strong Buy).

Alliance Data Systems  
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Brian Bolan is the Aggressive Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the Zacks Home Run Investor service

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