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Reasons Why Investors Should Hold Alliance Data (ADS) Stock

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Alliance Data Systems Corporation is well-poised to gain from higher merchant fee revenues, improved card services, strategic acquisitions and solid capital position.

The company has a favorable VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

The stock has seen its estimates for 2020 move up 0.5% in the past seven days, which reflects investor optimism.

The Zacks Consensus Estimate for 2021 earnings per share is pegged at $11.39, indicating year-over-year increase of nearly 85.1%.

Why Should You Retain the Stock?

Alliance Data is well-poised to gain from solid performance in Europe, Asia and Brazil, increase in finance charge yield, improved normalized average receivables, higher merchant fee revenues due to reduced payments to retailers, and increase in other servicing revenues, which continues to contribute to its top-line growth. Its top line witnessed a six-year CAGR (2013-2019) of 4.4%. The Zacks Consensus Estimate for the company’s 2021 revenues is pegged at $4.6 billion, indicating year-over-year increase of nearly 1.3%.

Card Services performed better than expected even amid the pandemic. Its sales activity improved throughout June as retailers reopened. The company continued to drive operational efficiencies via expense reduction.

As part of its strategic initiatives, the company remains focused on acquisitions, which have contributed to growth in revenues and profitability. Banking on solid financial strength and flexibility, Alliance Data has pursued strategic acquisitions to expand international footprint, consolidate its position in digital agency, boost the LoyaltyOne business, strengthen position in the digital marketing channels, expand its Omni-Channel distribution capabilities and widen presence in Brazil.

Additionally, Alliance Data boasts a solid balance sheet with strong cash balance. Long-term debt decreased 21.3% from the 2019-end level at second-quarter end. The company exited the second quarter with total cash and cash equivalents of $4.9 billion.

The company remains focused on returning value to its shareholders. In order to limit the adverse effect of foreign exchange, it uses share repurchases as a tool and focuses more on share buybacks than mergers and acquisitions. However, it suspended its stock repurchase program in April 2020. Its current dividend yield of 1.9% betters the industry average of 0.6%, which makes the stock an attractive pick for yield-seeking investors.

Furthermore, return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing over the past several years. Its trailing twelve months ROE of 42.3% betters the industry average of 28.5%.

However, shares of this Zacks Rank #3 (Hold) stock have lost 67.1% in the past year against the industry’s increase of 12.6%. Nonetheless, we expect higher revenues, solid card services performance, strategic initiatives as well as a robust capital position to aid the company’s turnaround in the near term.


Also, the company has been witnessing rising expenses due to higher cost of operations and an increased general and administrative expense. Such costs tend to weigh on the company’s margins. Notably, in the second quarter, net margin contracted 1450 basis points year over year.

Stocks to Consider

Some better-ranked financial transaction service providers are Envestnet Inc, (ENV - Free Report) , Qiwi PLC (QIWI - Free Report) , and International Money Express, Inc. (IMXI - Free Report) each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Envestnet surpassed estimates in each of the last four quarters, with the average being 14.28%.

Qiwi surpassed estimates in three of the last four quarters, with the average beat being 24.86%.

International Money Express surpassed estimates in three of the last four quarters, with the average beat being 10.82%.

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