Alliance Data Systems Has 'Significant Growth Potential,' BofA Says In Bullish Initiation

Alliance Data Systems Corporation ADS shares were trading up Monday aftter the company picked up a new sell-side bull. 

The Analyst

Bank of America Merrill Lynch analyst Kenneth Bruce initiated coverage of Alliance Data Systems with a Buy rating and $290 price target.

The Thesis

Alliance Data Systems is the third-largest private label credit card issuer in the U.S., a business that Bruce said should deliver mid-teens growth by leveraging ADS’ unique data assets and its retail partners to drive robust loan growth. (See the analyst's track record here.) 

“Given ADS’ differentiated approach, it has significant growth potential without jeopardizing asset quality,” Bruce said. 

While the company’s mall-based specialty apparel concentration has made the market skeptical, Bruce said headwinds are fading, which should support more stable growth. The analyst projecting 15-percent EPS CAGR over the next three years driven by 12-percent card loan growth and solid margins.

“Credit needs to stabilize, but we think this is doable in a healthy economic backdrop as ADS optimizes its collections efforts." 

With Alliance Data Systems' valuation remaining meaningfully below historical norms, Bruce said the company can recoup some of its legacy valuation premium to credit card-issuing peers if it can demonstrate more consistent operating performance and earnings growth.

“Over the near-term it will likely be driven by stabilizing credit costs, while more durable secular growth prospects will drive the longer-term value proposition for shareholders.”

In the long run, a re-rating is possible if the company can deliver sustainable growth that is less impacted by cyclical trends in consumer credit, according to BofA. 

Price Action

Alliance Data Systems shares were up 1.95 percent at $246.18 at the time of publication Monday.

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