UPDATE: Credit Suisse Cuts Alliance Data Systems (ADS) to 'Underperform'; Stock Should Trade Like Card Lender, Says Analyst
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(Updated - August 17, 2016 9:30 AM EDT)
Credit Suisse downgraded Alliance Data Systems (NYSE: ADS) from Neutral to Underperform with a price target of $190.00 (from $233.00). Analyst Paul Condra said he increasingly sees the company as a lender, and he thinks it should trade in other credit lenders at roughly 10x 2017 EPS.
"Our call is based on our view that increasing credit risk and the eventual market recognition of ADS as a lender and not a technology services company argue for a PE multiple in-line with other credit card lenders (i.e., 10x), yielding a price target of $190 (about 11% downside)," said Condra.
"Our analysis of master trust data finds a concerning spike in delinquencies and charge-offs in the 2015/2016 vintages (see Figs. 1-5), which did not occur prior to and during the Great Recession. While this does not mean aggregate charge-offs will exceed management’s guidance, we believe it does suggest a portion of the receivables portfolio may be exposed to higher credit risk relative to historical norms," continued the analyst.
Condra added, "The card services business (the majority of earnings) is operated out of two bank subsidiaries. As these entities have their own regulatory and capital requirements (that potentially limit what the parent can do with the cash earned), we believe this could eventually drive investors to consider more traditional credit-performance metrics when evaluating ADS (i.e., more capital ratios, less EBITDA), which could push valuation to be more in line with other credit card lenders."
Shares of Alliance Data Systems closed at $211.85 yesterday.
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