Alliance Data: A Balanced View - Analyst Blog

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On May 9, 2014, we issued an updated research report on Alliance Data System Corporation ( ADS ).

Adjusted earnings of $2.64 per share in the first quarter of 2014 surpassed the Zacks Consensus Estimate by 1.9% and improved 12% year over year on strong segmental performance. It delivered back-to-back positive surprises for two quarters.

The company's inorganic story seems impressive with several strategic acquisitions. With solid financial strength and flexibility, Alliance Data is well positioned to pursue strategic acquisitions to ramp up its growth profile.

The dotz coalition loyalty program in Brazil, where Alliance Data has 37% stake, now operates in 9 regions with about 12 million collectors enrolled under the program. The company intends to enter four additional Brazilian markets by 2014 taking the tally to 13. As the fifth-largest populated country, Brazil offers ample opportunities to Alliance Data to weave success out of a popular coalition loyalty program.

With respect to enhancing shareholders' value, this Zacks Rank #3 (Hold) financial transaction service provider remains committed to share buy back. The company's share repurchase authorization has increased nearly $3.6 billion since the first quarter of 2008 following the latest approval of $400 million this January. However, about $2.32 billion has been exhausted to date.

Banking on its operational strength, Alliance Data raised its 2014 revenue expectation to $5.25 billion from $5.14 billion guided earlier. This translates into a year-over-year increase of 22% (9% organic growth). Subsequently, core EPS expectation moved north to $12.25 from $12.20 (up 22% year over year). The Zacks Consensus Estimate is pegged at $11.61, translating into a year-over-year increase of 22.9%.

However, Alliance Data has been experiencing expense increases over the past few years. If the magnitude of revenue growth lags increase in operating expenses, it might take a toll on operating margin expansion.

With more than 60% of the Canadian households collecting reward miles, AIR MILES Reward Program has positioned itself as Canada's premier coalition loyalty program. If actual redemptions by AIR MILES Reward Program becomes higher than expected, or if there is an increase in costs related to redemption of AIR MILES, profitability might be affected. In addition, loss of clients might prove unfavorable for Alliance Data's top line as the company generates a major portion of its revenues from its 10 major clients.

Other Stocks to Consider

Other financial transaction service providers, which look attractive at current levels, include Fidelity National Information Services, Inc . ( FIS ), Green Dot Corp. ( GDOT ) and Xoom Corp. ( ZOOM ). While Fidelity National sports a Zacks Rank #1 (Strong Buy), Green Dot and Xoom carry a Zacks Rank #2 (Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: ADS , FIS , GDOT , ZOOM

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