Alliance Data's Favorable Valuation Balances Fundamental Concerns, Says Buckingham Analyst

Alliance Data Systems Corporation ADS is a "unique digital marketing powerhouse," according to Buckingham Research Group. 

The Analyst

Buckingham analyst Chris Brendler initiated coverage of Alliance Data Systems with a Neutral rating and $250 price target, suggesting 7-percent upside from current levels.

The Thesis

Although the expected closing of the delinquency "wedge" suggests stable loss rates in 2018 for ADS, recent credit trends haven't been encouraging, Brendler said in a Wednesday initiation note. (See the analyst's track record here.)

Buckingham's credit models project downside risk to the 2018 guidance, the analyst said. 

The competitive advantage of the company's Epsilon digital marketing segment is in doubt in light of recent struggles, Brendler said.

"With a disappointing lack of consistent detail on the subsegments and management guidance increasingly unreliable, we want to see more than one quarter of improvement before [becoming] optimistic." 

For ADS' "Loyalty" business, the analyst said he is concerned about the core Canadian franchise, even as BrandLoyalty seems poised for a big 2018 in the wake of a Walt Disney Co DIS deal and the World Cup.

Buckingham sees ADS' 15-percent loan growth target as "aggressive" in the absence of significant acquisitions, and especially as the company has tightened credit standards and pulled back on co-branding. 

"With heavy exposure to mall-based retail, sales volume has decelerated dramatically and needs a big rebound to get to management's loan growth guidance," Brendler said. 

Notwithstanding the fundamental challenges, Buckingham sees ADS' risk-reward as attractive due to "overblown" credit quality fears, easy comparisons, signs of progress at Epsilon and a "very attractive" valuation.

The Price Action

Alliance Data shares are down about 6 percent over the past year.

Related Links:

In Sports Retail, Expect A Challenging Year

Think Retail Is Making A Comeback? Citi Suggests O'Reilly And Walmart