Alliance Data Remains Well Positioned on Strong Fundamentals - Analyst Blog

On Aug 14, 2014, we issued an updated research report on Alliance Data System Corporation ( ADS ).

With adjusted earnings of $2.64 per share in the second quarter of 2014, the company surpassed the Zacks Consensus Estimate for three straight quarters with an average beat of 3.7%. Alliance Data continues to benefit from strong performance across all its segments.

The dotz coalition loyalty program in Brazil, where Alliance Data has a 37% stake, now operates in 10 regions with about 12.5 million collectors enrolled under the program. The company intends to enter three additional Brazilian markets by 2014 taking the tally to 13. As the fifth-most 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 buyback. The company, in the first half, bought back $201.8 million worth of shares.

It has also been strengthening its balance sheet with solid liquidity and also improving its debt capital ratio. Alliance Data's financial flexibility enables it to capitalize on opportunities as and when required.

Banking on its operational strength, Alliance Data raised its 2014 revenue expectation to $5.30 billion from $5.25 billion guided earlier. This translates into a year-over-year increase of 23% (9% organic growth). Subsequently, core EPS expectation moved north to $12.35 from $12.25 (up 23% year over year).

The Zacks Consensus Estimate witnessed an upward revision as most of the estimates were revised higher in the last 30 days. It was up 0.6% to $11.75 for 2014 and 1.2% to $13.73 for 2015. The estimates translate to a year-over-year increase of 24.2% and 17.1%, respectively. The expected long-term growth rate for the stock is 15.3%.

However, Alliance Data has been incurring higher expenses over the past few years, resulting in margin contraction.

With more than 60% of the Canadian households collecting reward miles, the AIR MILES Reward Program has positioned itself as Canada's premier coalition loyalty program. If actual redemptions by AIR MILES Reward Program are 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 will 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 Vantiv, Inc. ( VNTV ), Green Dot Corporation ( GDOT ) and Equifax Inc. ( EFX ). While Vantiv sports a Zacks Rank #1 (Strong Buy), Green Dot and Equifax 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 Nasdaq, Inc.

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

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