Project Description

Latest Thoughts on ADS

Here is a good VIC write up as well (need to create a free account to access).
Here’s how I’m thinking Alliance Data Systems (ADS).
On a consolidated basis, the stock looks cheap. It’s trading at 5.3x forward earnings. It’s best comp is probably Synchrony Financial which trades at 7.7x forward earnings.
In usual times, these companies (ADS and SYF) traded at ~10x earnings.
In 2019, ADS generated non-GAAP EPS of $16.78. About $2.78 of that is attributable to Loyalty One.
So if “normalized earnings” for the card business is $14 per share and a normalized multiple is 10x, the RemainCo should theoretically trade at $140 after it spins off Loyalty One. It’s trading today at $100. So it looks cheap.
What about Loyalty One?
Loyalty One is a weird business. There are no pure play comps so it will be interesting to see where it trades.
It doesn’t take credit risk but earns revenue when customers use their loyalty points.
I need to better understand how this business actually works/makes money, but in 2019 (pre-covid), the business generated $250MM of EBITDA.
It is dependent on travel, but otherwise should grow at approximately the rate of GDP.
I think an 8x EBITDA multiple is reasonable given it has mid 20% EBITDA margins and low capex requirements. I think if it traded much lower than that, it would eventually be sold to private equity who would run it to harvest its cash flows.
8x normalized EBITDA of $250MM implies an enterprise value of $2BN or $21 per share. That would work out to a FCF multiple of 7x which seems very cheap.
Add it all up and the business should be worth $161.
As I said before, I need to do more work, but this is how I’m thinking about it.