Alliance Data (ADS): Will Escalating Expenses Hinder Growth?

On Jun 6, 2016, we issued an updated research report on Alliance Data Systems Corporation (NYSE:ADS) .

The company delivered earnings per share that outperformed the Zacks Consensus Estimate on the back of solid organic growth. This Zacks Rank #3 (Hold) financial transaction service provider outperformed earnings in each of the last four quarters, with an average beat of 2.19%.

Alliance Data has been generating solid results on operational strength across all its segments. Also, the inorganic story remains impressive with strategic buyouts. The dotz coalition loyalty program in Brazil, where the company has a 37% stake is well placed with membership of nearly 18 million and has more than 60 million collectors enrolled.

Riding on its operational strength, the company is also strengthening its balance sheet. Banking on this strength, Alliance Data is effectively deploying capital by engaging in shareholder-friendly moves apart from pursuing growth initiatives. To this end, the company has targeted share buyback of $1 billion in 2016. This is turn is making the stock an attractive pick for yield-seeking investors.

However, escalating expenses are weighing on margin expansion and dependence on a few clients for revenue generation is a concern. Also, if there is an increase in costs related to redemption of AIR MILES reward miles, profitability may be affected. In addition, AIR MILES reward miles issued is directly proportional to AIR MILES reward miles available for redemption in the future. This in turn might affect revenues. For 2016, issuance growth is estimated in the range of 3–5% while redemption growth is expected to be in line with issuance growth.

Nonetheless, the Zacks Consensus Estimate for 2016 and 2017 moved up in the last 60 days as most of the estimates were revised higher. It increased 0.3% to $15.79 for 2016 and 0.7% to $17.88 for 2017. The expected long-term earnings growth rate is currently pegged at 13.8%.

Stocks to Consider

Some better-ranked financial transaction service providers are Total System Services, Inc (NYSE:TSS) , WEX Inc. (NYSE:WEX) and Global Payments Inc. (NYSE:GPN) . While Total System and WEX sport a Zacks Rank #1 (Strong Buy), Global Payments carries a Zacks Rank #2 (Buy).

WEX INC (WEX): Free Stock Analysis Report

TOTAL SYS SVC (TSS): Free Stock Analysis Report

ALLIANCE DATA (ADS): Free Stock Analysis Report

GLOBAL PAYMENTS (GPN): Free Stock Analysis Report

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