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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.

Alliance Data Systems Cashing In on Retailers' Struggles

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.

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Colin Plunkett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.