Analyst Note| Michael Miller |
No-moat Alliance Data Systems reported second-quarter earnings that benefited from the strong industrywide credit results. Recorded EPS of $4.07 comfortably beat FactSet consensus of $3.68. Earnings were supported by a $14 million loan-loss benefit, as a net charge-off rate of 5.1%, below normal for ADS, allowed the bank to release more than $200 million in reserves. ADS still has a reserve rate of 10.4%, leaving a little more room for reserve releases, though the majority should be behind us now. With a 30-day-plus delinquency rate of 3.3%, ADS will likely enjoy low charge-off rates until at least 2022. After incorporating these results into our model, we are increasing our fair value estimate for ADS to $84 from $79 as a result of lower projected net charge-offs in 2021 and 2022.