Alliance Data (ADS) Down 6.9% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Alliance Data Systems (ADS). Shares have lost about 6.9% 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 the most recent earnings report in order to get a better handle on the important drivers.

Alliance Data Q1 Earnings Miss, Revenues Down Y/Y

Alliance Data's operating earnings of $3.55 per share for the first quarter of 2019 missed the Zacks Consensus Estimate of $3.76. The bottom line declined 13.4% year over year.

Behind the Headlines

Alliance Data reported total revenues of $1.3 billion, down 3% year over year. The downside was due to lower revenues from its LoyaltyOne and Card Services segments.

Operating expenses declined 3.2% year over year to $977.3 million. Operating income decreased 4.2% year over year to $356.9 million largely due to lower revenues.

Adjusted EBITDA (net of funding costs) declined 9% year over year to $317 million.

Segment Update

LoyaltyOne: Revenues totaled $204 million, declining 10% year over year. Adjusted EBITDA increased 2% to $55 million. AIR MILES reward miles issued increased 3% on grocery vertical strength. AIR MILES reward miles redeemed declined 8%.
 
Card Services: Revenues were $1.13 billion, down 2% year over year. Adjusted EBITDA was $295 million, down 7% year over year.

The Epsilon segment was reclassified as Discontinued Operations due to pending sale to Publicis.

Financial Update

As of Mar 31, 2019, cash and cash equivalents was $3.7 billion, down 3.5% from Dec 31, 2018-level.

At quarter end, debt level was up 2.7% from 2018-end to $5.9 billion.

Cash from operations decreased 6% year over year to $610.8 million in the quarter. Capital expenditure at Alliance Data declined 13.4% year over year to $38.7 million in the same period.

Dividend Update

The board of directors approved 63 cents in quarterly dividend, payable on Jun 18, 2019 to stockholders of record as of May 14, 2019.

2019 Guidance Updated

Taking into effect the divestiture of Epsilon, the company estimates revenues to be $5.84 billion, up 4% from 2018. Core EPS is estimated to be $18.47, down 4% from 2018.

Divestiture of Epsilon

On Apr 14, 2019, Alliance Data inked a deal to sell its Epsilon business to Publicis Groupe for $4.4 billion in cash. The transaction is expected to be completed by the third quarter of 2019, subject to closing conditions.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.96% due to these changes.

VGM Scores

At this time, Alliance Data has an average Growth Score of C, 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 A. 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 this revision indicates a downward shift. 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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