Alliance Data (ADS) Up 10.4% Since Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Alliance Data Systems Corporation (NYSE:ADS) . Shares have added about 10.4% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Alliance Data Q4 Core Earnings, Revenues Rise Y/Y

Alliance Data Systems Corporation ADS reported core earnings attributable to stockholders per share of $4.67, up 13% year over year. The Zacks Consensus Estimate was $4.41.

For 2016, core EPS increased 12% year over year $16.92. Revenues were $7.14 billion, up 11% year over year.

Ed Heffernan, president and chief executive officer of Alliance Data, noted, “We were surprised and disappointed with the enactment of new legislation in Ontario that now prohibits the time-based expiration of reward points associated with all loyalty programs. The cancellation of our 5-year expiration policy necessitated a change in our breakage estimate, creating a one-time charge recorded as a reduction of revenue in the fourth quarter of 2016. Going forward, we will need to rework the AIR MILES Reward Program to replace the lost economics while maintaining a viable value proposition for collectors engaged in the program.”

Performance in detail

Alliance Data’s revenues came in at $1.83 billion in fourth-quarter 2016, climbing 4% year over year. The Zacks Consensus Estimate was $1.94 billion.

Operating expenses jumped 19% year over year to $1.65 billion primarily due to a rise in cost of operations and higher provision for loan losses. Operating income slumped 50.7% year over year to $179.6 million.

However, adjusted earnings before interest tax depreciation and amortization (EBITDA) were $566 million, up 12% year over year. Notably adjusted EBITDA excludes the impact of the cancellation of the AIR MILES Reward Program’s five-year expiry policy (expiry reset) on Dec1, 2016 and certain other significant items.

Segment Update

LoyaltyOne: Revenues totaled $247 million in fourth-quarter 2016, down 32% year over year. However, excluding the expiry reset impact, revenue surged 34% $489 million, mainly driven by strong redemption growth. Adjusted EBITDA declined 14% to $74 million. AIR MILES’ reward miles issued decreased 3%, while reward miles redeemed soared a whopping 173%.

Epsilon: Revenues were $600 million in the quarter, down 1% year over year. Adjusted EBITDA was $162 million, increasing 3% year over year. The quarter witnessed growth in core product offerings revenue (Auto, Technology, Data, Affiliate, CRM, Agency). However, non-core offerings revenue (CNVR Agency) decreased.

Card Services: Revenues came in at $988 million, up 26% year over year. Adjusted EBITDA was $299 million, up 21% year over year. Average credit card receivables, excluding amounts reclassified as assets held for sale, advanced 22% year over year to $15.3 billion. Net principal loss rates for the reported quarter were 5.5%, up 80 basis points year over year, chiefly due to account seasoning.

Financial Update

As of Dec 31, 2016, cash and cash equivalents was $1.86 billion, up from $1.17 billion as of Dec 31, 2015. At the end of the reported quarter, credit card and loan receivables, net, were $15.60 billion, increasing 19.4% from the prior-year period.

At the quarter end, debt increased 11.6% from year-end 2015 to $5.6 billion.

Capital expenditure at Alliance Data rose 8% year over year to $207 million in 2016.

Outlook

For 2017, the company expects revenue of $7.7 billion. Core EPS is projecetd to be $18.50, reflecting about 10% growth rate.

Management expects solid growth across all its businesses while absorbing the final credit normalization. Also it is focused on overhauling the AIR MILES model to align with the new laws in Canada

In LoyaltyOne, BrandLoyalty is expected to record 10% top and bottom line growth. AIR MILES issue is expected about 3%, the company lowered its breakage assumption for AIR MILES by 6% to 20%.

Regarding Epsilon, management expects core business to run about 5% growth and overall about 4%. EBITDA is expected to grow 4% or 5% in 2017.

Card receivables growth is expected at about 15% with stable gross yields. It also expects delinquencies to flattening out in the latter part of 2017, translating to flat losses 2018.

In first quarter 2017, delinquency rates are expected to be about 50 bps over the last year and then declining in second quarter and finally remain flat year over year in fourth quarter. Principal loss rates for 2017, is estimated in mid 5% range. Management expects loss rate to be less than 5.5% third-quarter 2017. It also noted that the first half of the year to be negatively impacted by the slow growth in the card receivables. However, despite higher loss rates, management remains confident to achieve 8% to 10% earnings growth from card business.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter. In the past month, the consensus estimate has shifted 8.45% downward due to these changes.

VGM Scores

At this time, Alliance Data Systems' stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with an 'F'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall,the stock has an aggregte VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Interestingly the stock has a Zacks Rank # 3 (Hold). We are looking for an inline return from the stock in the next few months.