Alliance Data Systems' (ADS) Price Target Lowered to $161 at Credit Suisse on Sum of Parts Valuation (Earlier)
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Credit Suisse earlier reiterated an Underperform rating on Alliance Data Systems (NYSE: ADS) and lowered its price target to $161.00 (from $190.00). Analyst Paul Condra said the change was tied to a sum of parts valuation to more accurately reflect the debt risk of the non-bank businesses (i.e., LoyaltyOne and Epsilon).
(The note was later praised on twitter by short seller Citron Research. For more color, click here.)
Condra summarized his view, saying, "We had derived our prior $190 target using a multiple of 10x on our 2017 adj. EPS forecast with the justification that the majority of GAAP earnings were derived from the card business and deserved a card-lender multiple. While we still view 10x as the right multiple for the card business, we now believe a sum-of the-parts (SOP) valuation more accurately reflects the debt risk of the non-bank businesses (i.e., LoyaltyOne and Epsilon). These businesses generated about $750m in adjusted EBITDA in 2015 (incl. estimated pro-rata corporate overhead), yet we believe they (and not the credit business) are the guarantors of the $5.7b in corporate debt, implying a roughly ~8x leverage ratio."
"To reflect this risk, our analysis values the non-bank businesses (LoyaltyOne and Epsilon) at $40; which is derived from 9x 2017 EV/EBITDA. This implies a residual value of roughly $160 for the card services business, or about 13.2x estimated 2017 EPS; above the industry median of 9.3x and the 10x we had used previously," continued the analyst.
Condra added, "Under our SOP framework, we use a market PE multiple of 10x on our 2017 card services adj. EPS forecast, yielding a price of $121, which adds up to $161 including the non-bank businesses."
Shares of Alliance Data Systems closed at $202.31 yesterday.
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