We initiated our coverage on
Alliance Data Systems Corporation
) with Neutral recommendation. The stock carries a Zacks Rank #3
ALLIANCE DATA (ADS): Free Stock Analysis
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Alliance Data has made strategic acquisitions to grow
inorganically. With the vision of obtaining a leading position in
digital agency, Alliance Data purchased Hyper Marketing (HMI)
group of companies in Nov 2012. With the addition of HMI, Epsilon
will have brands including Mars, Unilever, The Home Depot, and
Kellogg in its kitty. In Dec 2012, it also acquired Advecor Inc.
Earlier the company acquired Aspen Marketing Holdings, Inc. in
ROI-based targeted marketing has equal weightage as conventional
marketing and is projected to grow in the mid to
high-single-digit rate annually. Therefore, it is a prudent
decision for Alliance to acquire assets that have ROI-based
targeted marketing and to thus solidify its position to
capitalize on the opportunities offered by this segment of the
market. As such in Jul 2010, it acquired Direct Marketing
Services and Database Marketing divisions of Equifax, Inc.
The company's growth trajectory seems impressive based on its
The dotz coalition loyalty program in Brazil, where the company
has a 37% stake, continued its national rollout. It now operates
in more than five markets with more than 8.2 million customers
enrolled in the program. The company aims to enter four
additional Brazilian markets in the second half of 2013. It is on
track to exceed $100 million in revenues in 2013 and will have 10
million collectors by the end of the year.
Alliance Data remains focused to return value to its shareholders
via share buybacks. In the first half of 2013, the company bought
back 1.3 million shares for $208 million and currently is left
with shares worth $192 million under its $400 million
On the tepid side, we are skeptical about Alliance Data's
dependence on limited clients for a major chunk of revenues
besides increasing expenses. If magnitude of revenue growth lags
pace compared to magnitude of increase in operating expenses, it
might take a toll on operating margin expansion.
Moreover, the ten largest clients of the company generate a major
portion of Alliance Data's revenues. A failure to retain these
clients might be unfavorable for Alliance Data's top line.
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