Is Alliance Data A Great Stock For Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Alliance Data Systems Corporation (NYSE:ADS) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Alliance Data has a trailing twelve months PE ratio of 13.65, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 19.72. If we focus on the stock’s long-term PE trend, the current level puts Alliance Data’s current PE ratio much below its midpoint over the past five years, with the number having risen rapidly over the past few months.

Further, the stock’s PE also compares favorably with the broader industry’s trailing twelve months PE ratio, which stands at 26.93. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Alliance Data has a forward PE ratio (price relative to this year’s earnings) of just 12.92, so it is fair to say that a slightly more value-oriented path may be ahead for Alliance Data stock in the near term too.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Alliance Data has a P/S ratio of about 1.67. This is much lower than the S&P 500 average, which comes in at 3.10 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.

If anything, ADS is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, Alliance Data currently has a Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Alliance Data a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Alliance Data is just 0.96, a level that is far lower than the industry average of 1.71. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate.

Additionally, its P/CF ratio (another great indicator of value) comes in at 5.41, which is far better than the industry average of 15.96. Clearly, ADS is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Alliance Data might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘B’ and a Momentum score of ‘D’. This gives ADS a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been unfavorable. In the past two months, both the current quarter and full year have seen three estimates moving south, compared to no movement in the opposite direction.

This has had a substantial impact on the consensus estimate though as the current quarter consensus estimate has fallen by 8.7% in the past two months, while the full year estimate has inched lower by 0.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Despite the bearish analyst sentiments, the stock holds a Zacks Rank #3 (Hold). Thus, we are looking for in-line performance from the company in the near term

Bottom Line

Alliance Data is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Furthermore, a strong industry rank (among Top 21% of more than 250 industries) instills our confidence on the stock.

Furthermore, over the past two years, the broader industry has clearly underperformed the broader market, as you can see below:

So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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