December 7, 2009 - Alliance Data Systems (ADS-NYSE) together with its subsidiaries, provides data-driven and transaction-based marketing and customer loyalty solutions. The company operates through four segments: Loyalty Services, Epsilon Marketing Services, Private Label Services, and Private Label Credit.

The Private Label Services segment encompasses card processing, billing and payment processing, and customer care and collections services for private label retailers. The Private Label Credit segment provides private label retail credit card receivables financing; and securitization of the credit card receivables that it underwrites from its private label retail card programs. It primarily serves financial services, specialty retail, grocery and drugstore chains, petroleum retail, technology, hospitality and travel, media, and pharmaceuticals markets.

Alliance Data Systems Corporation was founded in 1996 and is headquartered in Dallas, Texas.

Here's the scoop: earnings have gone up every year since 2000 when the company went public and reported a negative 57 cents a share. The following years were much, much better, seeing earnings rise to $3.14 by 2006, then $3.75 in 2007, and $4.40 last year. This year should end with $5.10, according to the consensus among 16 analysts, then $5.95 next year. Over the last 5 years, earnings grew, on average, 26.36% a year. Analysts see growth of 14.5% a year, on average, for the next 5. For the fourth quarter look for $1.62, well above the $1.19 of the fourth last year. For the first quarter of next year, analysts expect $1.42, again well ahead of the $1.19 the company reported in the first period of this year.

With an earnings record like that, you'd think the stock would only go one way: up. But you'd be wrong. The stock hit a high of $80.80 in 2007 only to see the price diminish to $22.76 in March of this year. But it didn't stay down long and now trades 168% above that low. Not bad for an 8 month investment. Can it still go higher?

Earnings would suggest yes. Any company growing earnings at a double digit rate in this economy shines like a National guitar. In the third quarter, earnings were up 15%, in spite of the weak credit market. While charge-offs in its Private Label sector increased, better expense and cost control in two other divisions, Loyalty and Epsilon, countered most of those losses. With new marketing programs and help from recent acquisitions, the fourth quarter should improve on the third by double digits.

With credit cards a major concern for most issuers, ADS should see an increase in business, especially from private label retailers. Too many charge offs from bad credit has contributed to earnings deteriorating further for already crippled merchants. And the hassle of trying to collect only takes away from management time as well as adding expense. ADS can take all these headaches away for retailers.

The latest good news on employment (more hires in the service sector, overall unemploymnet down to 10%) suggests that credit card usage should be on the upswing. Look for even better numbers starting in early 2010.

ADS is expanding internationally. In October, the company bought a 29% stake in Dotz, a Brazilian customer loyalty program. Management says this is the first step in a strategy that will diversify the company's revenue base beyond the North American market.

More numbers: Marke Cap is $3.16 billion. Forward P/E is 10.3. Price to Book is 13.69. Book is $4.43. Operating margin for the last 12 months was 20.06%. Profit margin was 8.25%. Return on equity was an eye-popping 47.81%. Total cash is $449.2 million, making $8.60 a share. Total debt is $2.99 billion, about 48% of capital. Current ratio is 4.43. Total shares outstanding are 52.7 million. The float is 49.63 million with Insiders owning 5.05% of the stock. There is no dividend.

Alliance Data Systems has consistently delivered solid earnings, increasing them every year since going public. It's hard to find company's that can make that statement. This one deserves more time from investors looking to benefit from an economic recovery.

- Ted Allrich