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Alliance Data (ADS) Down 9.8% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Alliance Data Systems Corporation ADS. Shares have lost about 9.8% in that time frame, underperforming the market.

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

Alliance Data Posts In-Line Q4 Earnings, Keeps '17 View

Alliance Data Systems Corporation’s operating earnings of $3.64 per share in the first quarter of 2017 came in line with the Zacks Consensus Estimate. Earnings, however, improved year over year by a penny.

Epsilon and Card Services delivered solid performance in the quarter. However, results at LoyaltyOne were weak.

Behind the Headlines

Alliance Data’s revenues came in at $1.9 billion, up 12% year over year. The top line beat the Zacks Consensus Estimate of $1.8 billion.

Operating expenses jumped 14.6% year over year to $1.5 billion, primarily due to a rise in the cost of operations and higher provision for loan losses. Operating income improved 2.4% year over year to $352.4 million.

However, adjusted earnings before interest tax depreciation and amortization (EBITDA) were $501 million, up 2% year over year.

Segment Update

LoyaltyOne: Revenues totaled $333 million, down 6% year over year. Adjusted EBITDA declined 26% to $59 million. AIR MILES’ saw its reward miles issued and redeemed decreasing 4% each.
    
Epsilon: Revenues were $529 million in the quarter, up 7% year over year. Adjusted EBITDA increased 5% year over year to $85 million. The quarter witnessed growth in core product offerings revenues (Auto, CRM, Agency). The quarter witnessed the strongest revenue growth in five quarters.

Card Services: Revenues came in at $1 billion, up 22% year over year. Adjusted EBITDA was $331 million, up 8% year over year. Average credit card receivables, excluding amounts reclassified as assets held for sale, advanced 16% year over year to $15.7 billion. Net principal loss rates for the reported quarter were 6.3%, up 110 basis points year over year, chiefly due to account seasoning.

Financial Update

As of Mar 31, 2017, cash and cash equivalents was $1.87 billion compared with $1.86 billion as of Dec 31, 2016. At the end of the reported quarter, credit card and loan receivables, net, were $15.76 billion, down 4.7% from the prior-year period.

At the end of the quarter, debt increased 12.5% from year-end 2015 to $6.3 billion.

Capital expenditure at Alliance Data decreased 15.1% year over year to $46.6 million in the quarter.

Guidance

For 2017, the company expects revenues of $7.7 billion. Core earnings per share is projected to be $18.50, reflecting growth rate of about 10%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to two lower.

Alliance Data Systems Corporation Price and Consensus

 

Alliance Data Systems Corporation Price and Consensus | Alliance Data Systems Corporation Quote

VGM Scores

At this time, the stock has an average score of 'C' on both growth and momentum front. Charting a somewhat similar path, 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 A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.

Outlook

While estimates have been broadly trending downward for the stock, the magnitude of these revisions indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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