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By Colin Plunkett, CFA | 01-12-2017 12:00 AM

Alliance Data Systems Cashing In on Retailers' Struggles

This mildly undervalued narrow-moat firm should continue to enjoy a significant tailwind from store-branded credit cards.

Colin Plunkett: We think narrow-moat-rated Alliance Data Systems is mildly undervalued. Currently the stock is trading at about a 10% discount to our fair value estimate.

We believe that as retailers struggle against competition from the likes of Amazon, they are much more likely to embrace offering store-branded credit cards for consumers. Retailers benefit in two big ways from offering store-branded credit cards. First, they are able to collect purchase data, enabling retailers to offer tailored marketing programs in the form of automated emails or mobile display ads for their cardholders. More importantly, retailers share in the revenue and late fees these cards offer. Income from these partnerships can really offset the anemic sales many retailers are experiencing. Really, the additional income stream is why we believe so many retailers have become enthusiastic in offering these cards.

So long as retailers continue to struggle without going out of business, they will enthusiastically market these cards to shoppers providing a significant tailwind for Alliance Data Systems.

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