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Alliance Data (ADS) Down 11.2% Since Last Earnings Report: Can It Recover?

About a month has passed since Alliance Data Systems (ADS) last reported earnings. Shares have lost about 11.2% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Alliance Data waiting for a breakout? Before we dive into the recent reaction from investors and analysts, let’s take a quick look at the company’s most recent earnings report in order to get a better handle on the important factors influencing the situation.

Alliance Data (ADS) – Q3 Results, FY18 Revenue Cut

Alliance Data Systems Corporation’s operating earnings of $6.26 per share in the third quarter of 2018 beat the Zacks Consensus Estimate by 0.16%. The financial result improved by 17% year-on-year thanks to improved results in the card services and LoyaltyOne segments.

Behind the headlines

Alliance Data generated total revenue of $1.9 billion, up 2% year-over-year. Pro forma revenues, adjusted for the change in net revenue presentation for AIR MILES effective January 1, 2018, increased 5% year-over-year to $2.02 billion. The top line missed the Zacks Consensus Estimate of $2.06 billion.

Operating expenses decreased 0.6% year-over-year to $1.4 billion, primarily due to higher provisions for credit losses and amortization. Operating income increased nearly 9% year-over-year to $522 million.

Adjusted EBITDA (net of financing costs) increased 2% year over year to $563 million.

Segment update

LoyaltyOne: Revenues were $329 million, up 8% year-over-year. Adjusted EBITDA increased 4% to $63 million. The number of AIR MILES awarded increased by 3% and the number of AIR MILES awarded increased by 1%.

Epsilon: Revenues for the quarter were $538 million, down 4% year-over-year due to lower margins in the agency business and site-based display product offerings. Adjusted EBITDA of $125 million was consistent with the prior-year quarter.

Card services: Revenues were $1.2 billion, up 10% year-over-year. Adjusted EBITDA was $414 million, up 4% year-over-year.

Financial update

As of September 30, 2018, cash and cash equivalents were $3.6 billion, down 14% from $4.2 billion as of December 31, 2017.

At the end of the third quarter, debt levels decreased by 4.5% to $5.8 billion compared to the end of 2017.

Cash from operations increased 15.2% year-over-year to $2 billion in the first three quarters, while capital expenditure at Alliance Data decreased 15.5% year-over-year to $149.3 million in the same period.

2018 Guidelines

The company continues to expect underlying EPS to be in the range of $22.50 to $23.00, an increase of 16% to 19% compared to 2017.

Net revenues are expected to be $7.9 billion, with pro-forma revenues estimated at $8.2 billion. These estimates were lowered from prior guidance to reflect continued weakness in some of Epsilon’s product offerings and the initial impact of strategic initiatives.

How have estimates changed since then?

Over the last month, investors have seen an upward trend in new estimates.

VGM results

Currently, Alliance Data has a nice growth score of B, which means the same momentum score. Charting a somewhat similar path, the stock was rated A for Value, putting it in the top 20% of stocks for this investment strategy.

Overall, the company’s Total VGM Score is A. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company show an upward trend, and the scale of this revision looks promising. Notably, Alliance Data carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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