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Momentum

Alliance Data Systems (ADS)

Consumers have been saving more of their money as of late, but at the same time consumer credit is increasing.  Revolving credit lines are on the rise and based on overall data, the US consumer is getting just a little bit stronger.

Due to the strengthening consumer, the average corporation is seeing a small boost in revenues and maybe companies are likely to spend a bit to increase their sales and retention of customers.   In turn, consumers may be a little more willing to spend some of that “just in case” money on goods and services. 

After the financial crises of 2008-09, credit all but dried up and corporate profits plummeted.  As the world continues along its slow recovery, companies like Alliance Data are providing credit, marketing and retention solutions that keep the customer engaged and spending. 

With the increase we are seeing in consumer credit and confidence, it could be a sign that things are set to improve at ADS as well.

Company Description & Developments
Alliance Data is an international provider of data-driven and transaction-based marketing and customer loyalty solutions.  Formed in 1996, they have nearly 9,000 employees and are based just outside of Dallas, TX.

The company is split into three businesses; Retail services, LoyaltyOne and Epsilon.  Together they provide a suite of diverse services to their clients.  They offer private label, co-brand and commercial credit card programs, one-to-one and coalition loyalty programs and loyalty consulting.  In addition, ADS provides consumer database marketing, permission-based email marketing, data services and creative agency services.

You may have come across ADS if you have a loyalty card from Walgreens, a player’s card from MGM Grand Casinos or subscribe to their Air Miles reward program which is based in Canada, among many others.

In a research note, ADS said “ we [know] that understanding subtle shopping habits would help us better relate to customers – and ultimately, help our retail partners sell more to them.”  I think that sums up their business model well.

ADS recently signed a multi-year renewal agreement with “Buckle” and on February 2nd, beat estimates and announced strong guidance for FY2012 sending shares higher and bringing the stock closer to a Zacks Rank 1. 

Financial Profile
ADS is a mid-cap (6.07billion) company that is trading at about 15.15 times forward (expectations for next quarter) earnings.

ADS became a Zacks Rank 1 strong buy on February 27th, 2011.

Alliance Data reported a quarterly sales increase of only 0.33% at their last earnings report and saw a 27% drop in EPS for the same period (mostly due to dilution of shares).  Annual sales were up 12% compared to (fiscal) FY2010 with total sales of roughly 3.17 billion in FY2011.  ADS earnings increased from $3.69 in FY2010 to $6.22 in FY2011 and are expected to earn $8.02 in FY2012 according to the Zacks Consensus Estimate. 

Earnings Estimates
Alliance Data guided 2012 earnings higher than expectations during their last report.  Strong performance across all the segments and share buyback helped Alliance Data to post better-than-expected results. 

ADS reported that operating income increased 29% year over year to $181.3 million in the quarter while full year operating income increased 29.2% over 2010.  EBITDA in the last quarter were $230.8 million, up 19% year over year, thanks to solid results across all the segments. Fiscal 2011 EBITDA increased 23% over 2010.

Alliance has surprised analysts to the upside 4 quarters in a row at an average of 15.47%.

Of the 13 analysts who cover ADS, the consensus is for the company to grow earnings by 11% in the current year (FY2012) and roughly 13.5% in FY2013. 

In terms of the magnitude of analyst estimate trends, we are seeing all of the consensus estimates higher than they were 90 days ago for the next quarter as well as FY2012 and FY2013, the current quarter has seen some downward adjustments.

Market Performance & Technicals
ADS has been bullish throughout the past 12 months.  It took a sharp, quick break in August of 2011 with the rest of the market, but has been making a series of higher lows and higher highs since that point.

The stock has maintained above its 200 day moving average, even during the downturns and is currently above both the 50 and 200 day averages of $98.64 and $110.44 respectively. 

ADS has exceeded the S&P 500’s performance in the past year by almost 50% and outpaced it by over 8% in the past 3 months during its recent rally.  The stock remains in a bullish trend and has maintained its momentum in the past month, leading the index by about 5%.    

Alliance has a beta of 1.52, which can add some volatility to the stock when compared to the broad market.  The only substantial support the stock has is right around the 50 day moving average of $112. 

Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.

 

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