Stifel Downgrades Alliance Data Systems, Cites Market Sensitivity To Credit Risk

Stifel has downgraded Alliance Data Systems Corporation ADS to Hold from Buy saying that the company's "recent credit trends suggest fundamental deterioration is likely."

The brokerage said the company may miss its 2016 loss outlook of 5.5 percent (Stifel: 5.16 percent) and even more unlikely to hit 2017's 5.5 percent target (Stifel: 5.76 percent), prompting Stifel to take a "wait-and-see approach."

"[W]e now think mgmt's loss guidance is at risk. Although we still believe in the franchise and view the stock as undervalued, the market is overly sensitive to credit risk in this environment and as such, we prefer to take a more cautious approach," analyst Christopher Brendler wrote in a note.

That said, Brendler still believes the stock is cheap and could "revalue sharply" higher if credit fears/anxieties prove overblown.

Caution Remains Prudent

However, the analyst noted that the recent delinquency trends suggest losses are inching higher, not lower.

"Although the NCO rate did fall more than we forecast (down 19 bps to 5.01 percent) and enabled ADS to meet its 2Q16 loss guidance, we think this is mostly due to elevated recoveries as GCO were flat m/m in the trust," Brendler continued.

Related Link: A SOTP Analysis Of Alliance Data Systems Supports $250 Share Price, Says Pacific Crest

"While recovery rate volatility is nothing new at ADS, we think the spike this month is likely unsustainable," the analyst added.

Moreover, the analyst noted that the delinquency trends now enter the seasonally weakest part of the year.

"We see fundamental deterioration at a time when most major card issuers are still reporting excellent credit trends. Although some of ADS's relative weakness can be attributed to its outsized loan growth, we also note a significant increase in lower-quality accounts according to ADS's internal credit scores," Brendler highlighted.

At time of writing, shares of Alliance Data Systems were down 1.75 percent on the day to $209.45.

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