Alliance Data Closer To A Card Lender Than Tech Company Says Credit Suisse; Downgrades

Alliance Data Systems Corporation (NYSE: ADS) is being increasingly viewed as a lender, and its shares should trade in-line with other credit card lenders, rather than with technology services companies, Credit Suisse’s Paul Condra said in a report. He downgraded the rating on the company from Neutral to Underperform, while reducing the price target from $233 to $190.

Viewed As A Lender

The market would eventually recognize Alliance Data as a lender, analyst Condra commented. The operations of the company’s card services business, which contributes the lion’s share of earnings, is at two bank subsidiaries. These two entities are limited by regulatory and capital requirements, which limits the parent company’s use of the cash generated by them.

Related Link: Alliance Data Reports Avg. Receivables Of $13.8 Billion For Month Ended July 31

This would likely 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,” Condra mentioned.

Increasing Credit Risk

Credit trends suggest higher risk and could exert pressure on Alliance Data’s shares. There seems to have been a sharp increase in delinquencies and charge-offs in the 2015/2016 vintages.

“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,” the analyst pointed out.

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