- By GF Value
The stock of Alliance Data Systems (NYSE:ADS, 30-year Financials) is estimated to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $118.69 per share and the market cap of $5.9 billion, Alliance Data Systems stock shows every sign of being fairly valued. GF Value for Alliance Data Systems is shown in the chart below.
Warning! GuruFocus has detected 9 Warning Signs with ADS. Click here to check it out.
ADS 15-Year Financial Data
The intrinsic value of ADS
Peter Lynch Chart of ADS
Because Alliance Data Systems is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Alliance Data Systems has a cash-to-debt ratio of 0.35, which ranks in the middle range of the companies in Credit Services industry. Based on this, GuruFocus ranks Alliance Data Systems's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Alliance Data Systems over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Alliance Data Systems has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.5 billion and earnings of $4.48 a share. Its operating margin is 11.13%, which ranks in the middle range of the companies in Credit Services industry. Overall, GuruFocus ranks the profitability of Alliance Data Systems at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Alliance Data Systems over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Alliance Data Systems is -1.2%, which ranks in the middle range of the companies in Credit Services industry. The 3-year average EBITDA growth rate is -22.7%, which ranks worse than 79% of the companies in Credit Services industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Alliance Data Systems's ROIC was 1.99, while its WACC came in at 7.34. The historical ROIC vs WACC comparison of Alliance Data Systems is shown below:
In short, the stock of Alliance Data Systems (NYSE:ADS, 30-year Financials)is believed to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 79% of the companies in Credit Services industry. To learn more about Alliance Data Systems stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.