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Stocks flipped out on Wall Street last week following a selloff in the euro zone that was sparked by news of serious financial deficiencies at one of Portugal’s largest banks.
Normally, trouble at a Portuguese bank would not even make an eyelid flutter in New York, but this headline caught the collective unconscious in a vulnerable moment, inducing fears of a renewed contagion effect similar to the credit crisis that shook the region three years ago.
It’s kind of like when a friend starts crying during a movie that isn’t really sad or scary, and you’re not sure why. Something triggers a memory, and suddenly they’re a mess.
In this case, the Portuguese bank situation is about as scary as Gumby, but the situation made everyone remember that euro-zone policy makers never dealt with the 2008 financial crisis as effectively as their U.S. counterparts, and one or two wrong turns could unravel the system again.
The angst has now passed, and stocks are ripping higher again around the world, so most people are going to file this incident away in the drawer in their minds marked “WTH.”
But for investors it would be more valuable to file it in the drawer marked “Remember to buy stocks when the market freaks out for a couple of days about things that happen in Europe, the Middle East or China that don’t affect the earnings cycle in the United States.”
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One of the most important lifecycle trends observed in the past couple of years is millennials’ preference for apartment rental over house buying or remodeling.
A good example of that was seen in the stock market in the past week, and explained in the three charts above: apartment complex developer AvalonBay Communities (AVB) shot out to an all-time high despite the weakness in the rest of the market, while home remodeling supplier Lumber Liquidators (LL) plunged 27 percent to a new two-year low. Hardware chain Lowe’s (LOW) was also struggling.
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One thing that millennials have plenty of is credit cards, and they are loyal to a fault. There’s a way to turn that obsession into a good investment, however, via a little known but powerful company called Alliance Data Systems (ADS).
I’ve been recommending the stock since it was just a $3 billion market cap, and it seldom pulls back enough to allow a new entry. It’s now at a $15 billion market cap, but some cybersecurity issues at one of its divisions created enough fear, uncertainty and doubt earlier in the year to provide a new entry opportunity.
Compared with some of the other companies I have highlighted for you here in the past, ADS may not seem very exciting. In part that is because the company’s main draw is not a tangible consumer good, but a bundle of services targeted towards businesses.
Despite its obscurity, ADS merits your attention because its business model is absolutely sound, and its leadership in a growing industry makes it a gem.
Founded in 1996 and headquartered in Plano, Texas, Alliance Data Systems helps more than 750 customers acquire and retain repeat retail customers. To achieve these goals, ADS is segmented into three major segments: LoyatlyOne, Epsilon, and Private Label Services & Credit.
LoyaltyOne accounts for roughly 25 percent of ADS’ revenue, and provides a variety of systems focused on increasing customers’ loyalty to a retailer. They aim to reward repeat customers by providing them with loyalty points that can be redeemed for various products and services.
It can often be expensive and complicated for a company to implement such a system on its own, so many choose to hire ADS to do it for them. One notable LoyaltyOne systems is the AIR MILES program in Canada (click), the sponsors of which include Old Navy, Eastlink, Irving Oil, and Staples Canada Inc.
Epsilon, meanwhile, focuses on the management and data processing side of the loyalty business. Offering counseling and database technologies, Epsilon helps clients better understand and strengthen their relationships with customers.
Private Label Services and Credit is the largest segment, bringing in nearly half of Alliance Data Systems’ revenue. This scope of this segment ranges from risk management to transaction processing and marketing. One of the key services it provides is co-branded credit cards for its clients to offer customers to use at retailers.
In addition to providing these cards, ADS also manages the transactions and processing. This segment also helps its clients by offering marketing strategies in order to help them acquire and retain repeat customers.
An example: If you use an airline-branded Visa card to buy a newsletter subscription, in the background is a company like ADS that totes up the points and makes sure that they are credited to you properly. You probably did not realize that the retailer — not the airline — actually pays for those points. Every month, we get a Visa statement that shows how much we had to pay to loyalty programs. So if you are flying to Europe first class this summer on affinity-card miles, thank your favorite retailers (like us) rather than the airline!
Together, these three segments let Alliance Data Systems effectively target not only the consumer loyalty market, but also companies in need of more generalized business management systems. ADS’ ability to continuously grow in all three segments speaks highly of its management and targeting.
Mergers and acquisitions have been the cornerstone of ADS’ growth strategy for years, dating back to its formation in 1996 when JC Penney’s (JCP) credit card processing unit and The Limited’s credit card bank operations combined.
Its more recent deals, such as the acquisitions of Hyper Marketing in 2012 and Aspen Marketing Services in 2011, allows ADS to continuously expand its scope and increase control over its own development and distribution channels. Given the company’s consistent revenue growth, critics would be hard pressed to argue with this strategy.
President and Chief Executive Ed Heffernan oversaw many of the acquisitions as head of M&A for several years before moving up to chief financial officer and eventually to the top spot. Prior to Alliance Data, he led the acquisition efforts at peer First Data Corporation.
Financially, ADS is strong, with steadily rising revenues and earnings and a manageable level of long-term debt. All three segments have contributed to its growth in recent years.
The company went public in June 2001, and its shares have improved steadily since then, with a noticeable boost following a merger in mid-2010. The stock was up 40 percent in 2012 and 80 percent in 2013. Shares were hit earlier this year over privacy concerns, but are now back on track.
As customer loyalty systems and data processing are increasingly important, competition and regulation are expected to intensify for ADS. Yet I believe ADS will be up to the challenge and continue to thrive, enhancing its dominant position.
Best wishes,
Jon Markman
P.S. My mission is to introduce you to the companies I feel are destined to be the Amazons, Apples, and Microsofts of the 21st century. And I have a report for you explaining exactly how I’ll do that. Click here to get your FREE copy now.
