One Stock at the Top of its Class
Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
No matter which school, no matter which year – every graduating class has its standout students. The accomplishments of these individuals put these students clearly at the top of the class. The same is true in the world of investing. There are certain stocks that stand out at the top of their class.
In my previous post, I noted that there are a few stocks that are ready to graduate to the next level. By next level, I’m referring to moving up to the S&P 500 Index. The first stock on my list (in alphabetical order) was Advance Auto Parts. The next stock is another “A” student – Alliance Data Systems (NYSE: ADS). Let’s look at the impressive resume for Alliance Data.
Activities & Honors
Alliance Data is the child of successful parents. The company received its start in 1996 following a venture capital firm-sponsored merger of JC Penney’s transaction services business and The Limited’s credit card bank operations. Alliance Data specializes in providing loyalty marketing solutions based on sophisticated data analysis.
Three business segments form the core of Alliance Data’s operations:
- Retail Services – provides integrated credit and marketing solutions including private label, co-brand and commercial credit card programs to more than 90 leading brands. Generates nearly 47% of overall revenue.
- LoyaltyOne – develops and manages loyalty marketing services for more than 100 leading brands. Accounts for nearly 27% of overall revenue.
- Epsilon – offers integrated marketing services including strategic consulting, data analysis, creative design, and direct mail/email campaigns for over 2,200 brands. Represents nearly 27% of total revenue.
Primary competitors in the retail services market include Visa (NYSE: V), MasterCard (NYSE: MA), American Express (NYSE: AXP) and Discover Financial Services (NYSE: DFS). Visa and MasterCard are also partners because Alliance Data manages programs using their cards.
Alliance Data competes against the major credit card companies by targeting data-driven marketing to increase customer purchases for specialty retailers. The company states that its cardholders spend 30-40% more than non-cardholders. These results have paid off with a nearly 100% client renewal rate. This high renewal rate is very important to the company’s continued success, since over 45% of Alliance Data’s revenues come from its 10 largest clients.
While Alliance Data hasn’t made any of the “500” lists (S&P, Fortune or Barron’s), it has a claim to fame that few companies can boast. Its stock is in the top 1% of all publicly traded stocks in shareholder return over the past 10 years. Take a look below at how a $10K investment in Alliance Data compares to 15 of its peers and to the entire S&P 500 over the past 6 years (as of the end of each year).
The S&P 500 is slightly lower than where it began in 2006. The peer group, including all of the companies mentioned earlier, is up on average by a little over 8%. Alliance Data, though, is more than 66% higher than the end of 2006 despite the big market downturn in 2008.
Our investing version of GPA includes several key metrics. How does Alliance Data match up against its peers?
Alliance Data’s numbers look good with a stellar ROE and attractive valuation reflected by its forward P/E and PEG ratio. The stock has performed well in its most recent quarter also, with GAAP EPS up 57% versus last year and core EPS increasing by 30% compared to last year.
The company appears poised to continue its winning ways. Much of its business stems from multi-year contracts. Several new multi-year agreements and extensions to current agreements have been signed over the last few months with clients including Limited Brands, J. Crew, J. Jill, Marathon Petroleum, Pier 1 and Bon-Ton. These should ensure steady revenues over the coming years.
Does Alliance Data deserve to “graduate” to the S&P 500? Its market cap of $6.35 billion outranks well over 100 of the companies currently in the index. The company is more profitable than many in the S&P 500. We have already seen its remarkable stock performance and great metrics.
However, S&P likes to ensure a balance between sectors in the index that reflect the overall stock universe. An argument could be made that Alliance Data’s sector is already adequately represented in the S&P 500. Also, while total revenues are not a publicized criteria for inclusion in the index, Alliance Data’s 2011 revenues of $3.32 billion fall short of landing it in the top 500 in that category.
When it comes to your money, your stock selection as an individual investor is more important than S&P’s pick. With a 10-year performance in the top 1% and excellent future growth thanks to the customer value that it provides, Alliance Data might deserve graduating to your top list of stocks.
Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of MasterCard. Motley Fool newsletter services recommend American Express Company and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.