Can Card Receivables Aid Alliance Data's (ADS) Q4 Earnings?

Alliance Data Systems Corporation (NYSE:ADS) is slated to report fourth-quarter 2017 results on Jan 25 before the market opens. Last quarter, the company delivered a positive earnings surprise of 6.36%.

Let’s see, how things are shaping up for this announcement.

We expect operating expenses to increase in the soon-to-be-reported quarter, primarily due to the company’s strategic initiatives, which include expansion efforts as well as higher cost of operations plus an increased general and administrative expense. This in turn might restrict the operating margin expansion.

Moreover, the company anticipates witnessing lower AIR MILES reward miles redeemed, which in turn will weigh on the AIR MILES revenues in the quarter to be reported. The Zacks Consensus Estimate for the metric is pegged at 1.6 billion, reflecting a year-over-year plunge of 41.5%.

Nonetheless, Alliance Data expects better-than-expected performance at BrandLoyalty, one of the loyalty programs of the company’s LoyaltyOne segment. The company projects BrandLoyalty’s revenues and adjusted EBITDA to increase by double digits year over year in the yet-to-be-reported quarter.

Further, Card Receivables — accounting for more than 50% of the company’s revenues — will continue to generate higher yields as Alliance Data has been rapidly growing its private label card portfolio with a number of wins from both the new and existing clients. The Zacks Consensus Estimate for Card Receivables revenues is pegged at $1.1 billion, improving 12.3%, while EBITDA is estimated at $315 million, up nearly 5.4%. Average receivables are estimated at $17.4 billion, increasing 13.6% year over year.

Additionally, the company anticipates experiencing growth in auto, CRM (Customer Relationship Management) and data supporting Epsilon segments. The Zacks Consensus Estimate for Epsilon revenues is expected to rise 4.2% year over year to $625 million.

Share buybacks must have lent an additional cushion to the company’s bottom line. The consensus mark for earnings of $5.00 per share represents a 7.1% year-over-year gain.

With respect to the top line, the consensus estimate is pegged at $2.1 billion, reflecting year-over-year growth of 17.5%.

Earnings Whispers

Our proven model does not conclusively show that Alliance Data is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Alliance Data has an Earnings ESP of -1.06%. This is because the Most Accurate estimate is pegged at $4.95, lower than the Zacks Consensus Estimate’s $5.00. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Zacks Rank: Alliance Data holds a Zacks Rank #3, which increases the predictive power of ESP. However, a company needs a positive ESP to be confident about an earnings surprise. Thus, this combination leaves surprise prediction inconclusive.

We caution against all Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks worth considering from the finance sector with the right combination of elements to surpass estimates this time around are as follows:

The Progressive Corporation (NYSE:PGR) is set to report fourth-quarter earnings on Jan 24. The stock has an Earnings ESP of +0.52% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

American Financial Group, Inc. (NYSE:AFG) has an Earnings ESP of +1.21% and a Zacks Rank of 2. The company is set to announce fourth-quarter earnings on Jan 31.

CNA Financial Corporation (NYSE:CNA) has an Earnings ESP of +2.75% and a Zacks Rank of 1. The company is expected to release fourth-quarter earnings on Feb 5.

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