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Alliance Data (ADS) Up 36.3% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
·4-min read

It has been about a month since the last earnings report for Alliance Data Systems (ADS). Shares have added about 36.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Alliance Data 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 Earnings & Revenues Top, Decline Y/Y

Alliance Data operating earnings of $3.31 per share for the fourth quarter of 2020 beat the Zacks Consensus Estimate of $2.48. The quarterly earnings benefited from continued gradual recovery in Card Services credit sales.  

However, the bottom line plunged 20% year over year.

Behind the Headlines

Alliance Data reported total revenues of $1.1 billion, down 24% year over year, attributable to the continuing impacts of COVID-19. Both Card Services as well as LoyaltyOne segment generated lower revenues. The top line however beat the Zacks Consensus Estimate by 1.1%.

Operating expenses decreased 26.1% year over year to $851.2 million. Operating income decreased 16.3% year over year to $258.7 million largely due to lower revenues.

Adjusted EBITDA (net of funding costs) increased 2% year over year to $282.3 million.

Segment Update

LoyaltyOne: Revenues totaled $231 million, down 31% year over year, attributable to fewer short-term loyalty programs due to the impact of COVID-19 as well as the divestment of Precima.

Adjusted EBITDA decreased 45% to $44.3 million.

AIR MILES reward miles issued decreased 9%, reflecting a decline in discretionary spending, including credit card spend and delays in promotions by sponsors. AIR MILES reward miles redeemed declined 30%, reflecting the impact of the pandemic on travel-related categories, offset in part by strength from merchandise redemptions.

BrandLoyalty revenues decreased 35% due to a decline in programs.

Card Services: Revenues were $879 million, down 22% year over year, attributable to a decline in average receivables, primarily reflecting a decline in average receivables, lower sales volumes, and to some extent interest rate cuts earlier in 2020. Adjusted EBITDA was $259.8 million, up 24% year over year.

Full-Year Highlights

Operating earnings of $9.39 per share beat the Zacks Consensus Estimate of $8.57. However, the bottom line plunged 44% year over year.

Operating revenues of $4.5 billion in 2020 declined 19% year over year and marginally lagged the consensus estimate.

Financial Update

As of Dec 31, 2020, cash and cash equivalents was $3.1 billion, down 20.5% from Dec 31, 2019-level.

At quarter end, the debt level was down 1.6% from 2019-end to $2.8 billion.

Cash from operations increased 1.5% year over year to $1.9 billion in 2020. Capital expenditure at Alliance Data declined 62% year over year to $54 million in the same period.

Dividend Update

The board of directors approved a quarterly dividend of 21 cents to be paid out on Mar 18 to stockholders of record as of Feb 12.

2021 Guidance

Total revenues are estimated to be down in low single digits from 2020 as the impact from lower receivables is expected to be partially offset by improving revenues from LoyaltyOne and the Bread acquisition.

Credit sales are projected to increase in high single digits. The company expects to resume high single-digit to low double-digit card receivables growth as it exits 2021.

Expenses are expected to remain flat with 2020 level. It includes more than $100 million of digital innovation and technology enhancement investment to support growth and the delivery of positive operating leverage in 2022.

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How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -11.51% due to these changes.

VGM Scores

Currently, Alliance Data has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Alliance Data has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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