Bookkeeping: Starting New Position in Alliance Data Systems (ADS)

Since it is hard to really hold on to any sector trend in this market for a sustained period of time, I'm trying to find some "special situations" to help create some longer term return. One such name might be Alliance Data Systems (ADS) a position I'm starting today near $64 for 1.5% stake. This is a relatively "boring" company but with high cash flow and some potential catalysts coming its way. Company website here.

Alliance Data Systems Corporation, together with its subsidiaries, provides data-driven and transaction-based marketing and customer loyalty solutions. It offers marketing services, including coalition and stand alone loyalty; and analytical, strategic consulting and creative, proprietary data, interactive communications, and database marketing services. The company also provides credit services comprising underwriting and risk management, and receivables funding; and transaction services, which consist of new account processing, billing and payment processing, and remittance processing services.

The company was a target of Blackstone (BX), a private equity firm; in 2006/2007 private equity buyouts were all the rage. But that was then, when credit was cheap, plentiful and Wall Street was acting like drunken boors. Well they still act that way but with a lot less money in their pockets. Anyhow, long story short, the deal was announced in summer 2007, and ADS jumped from mid $60s to $80. A credit crunch later, the deal fell apart as Blackstone walked away - a lot of drama ensued, and ADS went from the low $80s (proposed purchase price) to (for a few days) lower $40s, before settling in the upper $40s and making a run to the $60s.

Long story short, the stock is now where it was before the buyout bid.


Now, aside from the base business, which is solid if not spectacular we have some interesting catalysts.

The company is undertaking a massive stock repurchase plan. Now, "approved" does not mean "we will do it" but they seem intent on it from past experience.

• Alliance Data Systems Corporation (NYSE: ADS - News), a leading provider of loyalty and marketing solutions derived from transaction-rich data, today announced that its board of directors has approved a new stock repurchase program to acquire up to $1.3 billion of the Company's common stock through the end of 2009. The program is in addition to the previously announced $500 million repurchase program, bringing the Company's combined repurchase authorization to $1.8 billion.
• The Company has already repurchased approximately $725 million worth of its outstanding shares, representing 12 million shares, or approximately 15 percent of outstanding shares as of the beginning of the year, and still has more than $1 billion remaining under the combined programs.
• "While the macro-economic environment has been challenging for the overall stock market, our strong track record of 29 consecutive quarters of meeting or beating expectations, combined with our solid outlook for 2008 and 2009, gives us strong confidence in our future," commented Ed Heffernan, chief financial officer, Alliance Data. "As such, we believe we have a unique opportunity to use both the low existing leverage of the Company as well as its high free cash flow generation to potentially repurchase as much as 35-40 percent of our existing share base at attractive prices. We believe this repurchase program is the best use of excess capital and underscores our confidence in the Company's long-term financial outlook as well as our commitment to optimizing our capital structure to enhance shareholder value."

The company only has a market capitalization of $4.3 Billion so you can see this is an enormous amount of potential repurchase. So as shares are repurchases, earnings PER share naturally go up - even without organic growth.

Second, an activist hedge fund, ValueAct Capital Management, has taken a sizeable stake. Here are all their holdings as of June 30th, but they've recently filed an even larger stake, in fact a near doubling since June 30th - as of a July 21st filing ValueAct is now up to 3.87M shares or 4.9% of outstanding shares. From what I can find on ValueAct they seem to be a friendly type of activist hedge fund, not the belligerent type. Without knowing their intent I would not be surprised to see them work to find a new bidder for ADS. Just my gut take.

ValueAct Capital, LLC is a San Francisco based hedge fund. The firm offers its services to high net worth individuals and institutions while investing in the public equity and hedging markets of the United States. VAC primarily invests in share re-purchase programs, public market recapitalizations, de-leveraging equity infusions, off-balance sheet financings, and going-private transactions.

At $64 the stock is trading at a forward P/E on 2008 of under 15x, for 15-20% type of growth. But that P/E ratio should actually be lower because by the time we get to the end of 08 and into 09 the amount of shares outstanding should be substantially lower and earnings per share higher. So it is cheaper than it looks. Last earnings report can be found here.

This is a non correlated, non financial, non commodity type of stock that also should provide the portfolio some stability in a sickly sea.

Long Alliance Data Systems in fund; no personal position