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Risk-Reward Balanced at Alliance Data

Zacks Equity Research

Alliance Data System Corporation (ADS) has made several strategic acquisitions to grow inorganically. With solid financial strength and flexibility, we expect Alliance Data to pursue strategic acquisitions that would help it ramp up its growth profile.

The dotz coalition loyalty program in Brazil, where the company has a 37% stake, continued its national rollout. dotz now operates in 9 regions markets with more than 10 million collectors enrolled under the program. The company aims to enter four additional Brazilian markets by 2014. Brazil, as the fifth-largest populated country with more than 199 million citizens, offers ample opportunities for Alliance Data to weave success out of a popular coalition loyalty program, and thus ramp up its dotz program in the years to come.

This Zacks Rank #2 (Buy) financial transaction service provider remains committed toward returning value to its shareholders. The company’s share repurchase authorization has scaled nearly $3.2 billion since the first quarter of 2008 following the latest approval of $400 million last December. However, about $2.2 billion has been exhausted to buy back 37.7 million shares to date.

Alliance Data raised its 2014 revenue expectation to $5.14 billion from $4.64 billion guided earlier. It translates into a year-over-year increase of 19% (8% organic growth). Core EPS expectation is now raised to $12.20 from $12.00 (up 22% year over year). The Zacks Consensus Estimate is pegged at $11.6%, translating into a year-over-year increase of 23.3%.

However, Alliance Data has been experiencing increasing expenses over the past few years. If the magnitude of revenue growth lags that of increase in operating expenses, it might take a toll on operating margin expansion.

With more than 60% of the Canadian household collecting reward miles, the AIR MILES Reward Program has positioned itself as Canada's premier coalition loyalty program. In the event of actual redemptions by AIR MILES Reward Program being higher than expected, or if there is an increase in costs related to redemption of AIR MILES reward miles, profitability will likely be affected. Also, loss of clients might prove unfavorable for Alliance Data’s top line as ten of the company’s major clients generate a major portion of its revenues.

Other stocks to Consider

Other financial transaction service providers, which look attractive at current levels, include Fidelity National Information Services, Inc. (FIS), Global Payments Inc. (GPN) and Total System Services, Inc. (TSS). While Fidelity National carries a Zacks Rank #1 (Strong Buy), Global Payments and Total System share the same Zacks rank as Alliance Data.

Read the Full Research Report on FIS
Read the Full Research Report on TSS
Read the Full Research Report on ADS
Read the Full Research Report on GPN

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