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

In the latest trading session, Walmart (WMT) closed at $91.08, marking a +0.34% move from the previous day.

It has been about a month since the last earnings report for Alliance Data Systems (ADS). Shares have lost about 11.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Alliance Data due for a breakout? 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 drivers.

Alliance Data (ADS) Q3 Earnings Meet, '18 Revenue View Cut

Alliance Data Systems Corporation’s operating earnings of $6.26 per share in the third quarter of 2018 were beating the Zacks Consensus Estimate by 0.16%. The bottom line improved 17% year over year on strength in Card Services and LoyaltyOne segments.

Behind the Headlines

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

Operating expenses dropped 0.6% year over year to $1.4 billion primarily because of higher provision for loan loss and depreciation and amortization. Operating income increased nearly 9% year over year to $522 million.

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

Segment Update

LoyaltyOne: Revenues totaled $329 million, improving 8% year over year. Adjusted EBITDA grew 4% to $63 million. AIR MILES’ reward miles issued increased 3% while AIR MILES’ reward miles redeemed ticked up 1%.
  
Epsilon: Revenues totaled $538 million in the quarter under review, down 4% year over year because of lower margin pass-through agency business and site-based display product offerings. Adjusted EBITDA of $125 million was in line with the year-ago quarter.

Card Services: Revenues came in at $1.2 billion, up 10% year over year. Adjusted EBITDA was $414 million, up 4% year over year.

Financial Update

As of Sep 30, 2018, cash and cash equivalents were $3.6 billion, down 14% from Dec 31, 2017-level of $4.2 billion.

At the end of the third quarter, debt level was down 4.5% to $5.8 billion from 2017-end.

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

2018 Guidance

The company continues to expect core EPS between $22.50 and $23.00, up 16% to 19% over the 2017 tally.

Net revenues are expected at $7.9 billion while pro-forma revenues are estimated to be $8.2 billion. These estimates were lowered from the earlier guidance to account for continued weakness in certain Epsilon product offerings and the initial impact of strategic initiatives.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Alliance Data has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Alliance Data has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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