Shares of credit services company Alliance Data Systems Corp. (ADS, Financial) surged 20% on Thursday. The Colombus, Ohio-based company reported its fiscal third-quarter results before the market opened, beating expectations for revenue and earnings.
Despite the rally, the stock remains down more than 53% this year. This suggests there could be more room to run heading into the tail end of the year. Alliance Data Systems' current share price is below the Peter Lynch earnings line, which suggests that it could be undervalued.
Highlights from third-quarter results
Alliance Data posted adjusted earnings of $3.45 per share for the quarter, which beat analysts' expectations of $2.28 per share. The company posted earnings of $5.05 per share for the same period a year ago, representing a decline of 32.9%.
The company's top line of $1.05 billion outperformed the consensus estimate by 2.23% despite declining from $1.44 billion a year ago. It attributed the performance to a significant decline in short-term loyalty programs amid the coronavirus pandemic, which pushed revenue from the LoyaltyOne business down 25% to $185 million.
On the other hand, sales from the Card Services unit edged 27% lower to $866 million. This was partly attributed to the interest rate cuts earlier this year that pushed average receivables lower.
The company's cash and cash equivalents as of Sept. 30 declined by 20.5% from the figure reported at the end of fiscal 2019.
Alliance Data approved a dividend rate of 21 cents per share payable on Dec. 18 to shareholders on record as of Nov. 13. This could provide some upward momentum for the stock going into the final moths of the year.
From a valuation perspective, shares of Alliance Data Systems trade at a trailing price-earnings ratio of about 7.5, which compares strongly to the price-earnings ratios of close peers Capital One Financial Corp.'s (COF, Financial) 12.17 and American Express Co.'s (AXP, Financial) 20.91.
The company's forward price-earnings ratio of 4.42 is also lower than Capital One's 9.30 and American Express's 15.53. When we factor in the expected earnings for the next five years, Alliance Data's PEG ratio of 0.08 is slightly higher than Capital One's 0.06, while American's Express's equivalent of 1.71 is far higher.
In summary, Alliance Data Systems appears to be competitively valued compared to close industry peers. The Peter Lynch earnings line also suggests a possible case of undervaluation. With the stock still down more than 50% this year, the company appears to have a lot of room to run.
Disclosure: No positions in the stocks mentioned.
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