World Financial Network’s private-label card portfolios outperform the competition, when looking at average excess spread, which is a profitability measure showing how much of the portfolio yield is kept by a credit-card secrutizer, after netting-out the securities’ coupon rate, loan losses, and servicing fees.
Sakhrani said that it’s not always fair to compare excess spreads, because “during the downturn, some issuers [including Discover Financial Services and American Express] provided subordination to their trusts, so their excess spreads are inflated by an effective subordination subsidy.”
Then again, for Alliance Data Systems’ World Financial Network card portfolios, Sakhrani said “there was no subordination,” so the card lender’s 24.43 percent annualized excess spread during February was a pure number. World Financial Network’s excess spread was the highest among the major U.S. card lenders, despite also having a relatively high net charge-off rate of 5.43 percent and the highest 30-plus days delinquency rate of 4.47 percent, because of the nature of its private-label card business. Private-label card portfolios typically see a higher level of revolving debt than bank-branded credit cards, boosting interest revenue.
Here’s how World Financial Network’s February card numbers compared other major U.S. card lenders:
- Citigroup subsidiary Citibank’s excess spread on its managed card portfolios during February was 8.23 percent. The company’s net charge-off rate was 5.36 percent and its 35-plus days delinquency rate — the other card lenders report delinquencies of 30-plus days — was 3.09 percent.
- For Bank of America, the February net excess spread for its managed card portfolios was 9.78 percent. The net charge-off rate for BAC’s managed card portfolios was 5.56 percent. The 30-plus days delinquency rate was 3.75 percent.
- JPMorgan Chase subsidiary Chase Issuance Trust had a 10.58 percent excess spread during February, for its managed credit card portfolios. Chase’s net charge-off rate for managed card balances was 3.97 percent, and the 30-plus days delinquency rate was 2.42 percent.
- For Discover Financial Services , the managed card portfolio excess spread during February was 12.66 percent. Discover’s net charge-off rate for its card portfolios was 2.80 percent, and its 30-plus days delinquency rate was 2.25 percent.
- Capital One’s February excess spread was 13.28 percent. The company’s net charge-off rate on managed credit card loan portfolios was 3.20 percent, and the 30-plus days delinquency rate was 3.34 percent.
- For American Express , the February net excess spread on managed credit card portfolios was 13.30 percent. The net charge-off rate was an industry-leading 2.73 percent, and the 30-plus days delinquency rate also led the industry, at just 1.58 percent.
Alliance Data Systems returned 20 percent year-to-date, through Wednesday’s close at $124.63.
Sakhrani’s $149 price target is “derived by applying a 13x multiple to our 2013 EPS estimate of $6.49 from the private label card segment along with an 8x multiple to our 2013 EBITDA/share estimate of $8.11 for the remainder of the company.”
The analyst expects Alliance Data Systems to report first-quarter earnings of $2.19 a share, compared to fourth-quarter earnings of $1.70 and first-quarter 2011 earnings per share of $2.03, on total revenue of $837 million, down slightly from $848 million in the fourth quarter, but increasing 13 percent year-over-year.
Sakhrani said that “ADS trades at very attractive valuations for its EPS growth rate and economic return profile relative to its peers," especially with a projected 2013 return on tangible equity of “50 percent-plus,” compared to an estimated 2013 ROTE of 32 percent for American Express, long the “gold standard” among card lenders. American Express trades for 12 times Sakhrani’s 2013 earnings per share estimate of $4.89.
For private label cards — representing 50 percent of company revenue — Alliance Data Systems’ “management recently noted that it was seeing sales up 15 percent year-over-year and portfolio growth of 7 percent year-over-year in the first quarter, and expects 10 percent year-over-year portfolio growth in the second quarter of 2012," Sakhrani said.
For the company’s customer loyalty business, “first quarter 2012, which compares to its long-term growth rate of 5 percent driven by the return of discretionary spending, strong spend at gas, grocery and pharmacy, and promotional work at groceries in Canada,” according to Sakhrani.
The analyst added that the Epsilon subsidiary — which generates roughly 25 percent of revenue — “is on track to generate $1 billion in revenues in 2012, with organic growth rates in the high-single-digits range.”
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