Four Reasons to Be Positive on Alliance Data

Shares of Alliance Data (ADS - commentary - Cramer's Take) are down over 6% today -- likely on the release of data that shows a look into the trends of consumer spending for its portfolio of receivables.

ADS is always an interesting stock to follow because it has an underlying bank called World Financial Network National Bank that submits monthly public filings that provide insight into the trends that impact the quarterly results for ADS, including receivables generated on the portfolio of its private-label credit cards, yield for portfolio, and charge-off data. Often a full three months of this "Master Trust" data is available before the company reports results, providing a solid window into the reported operating results.

The filings are intended for the bondholders of the receivables of the trust, so using the data to predict equity results can be tricky, as the data is an incomplete picture. The company also has important business segments in e-marketing and loyalty programs.

However, since those segments are performing solidly as marketing dollars flows to 1x1 programs, the emphasis remains on ADS' credit and private-label segment. Today's release of Master Trust data showed a sharp uptick in the charge-off data of its portfolio, that is, receivables that are going to be written off. The data today showed a 7.78% charge-off level for the month of October, a big surge from the 5.6% reported in September. This may lead some to say that its consumer portfolio is weakening.

But we are positive on shares of ADS.

Why ?

1. The uptick in charge-offs was expected and factored into the outlook when the company raised its guidance on the September-quarter earnings call. To quote CFO Ed Heffernan on the topic of charge-offs, "The second half of the year, Q4, specifically, will be somewhere in the sevens. We want to make sure no one freaks out when they see losses pop up to that level that's consistent with what we've been saying all year, but the year will average 6.5 as expected."

   Later in the Q&A section of the call, the CFO responded to a question from me with this answer on charge-offs: "And I think Q4 is going to be a little bit higher than anticipated. I think when you average them out, you know, they're about right where we want them to."

   Sorry, Ed, looks like people freaked out on the data, even though it's factored into most analysts outlook who listened to the call.

2. ADS has never missed a quarter as a public company. The management team delivers its promised results.
3. The company has a $1.8 billion buyback that it has been executing on, and one expects the company to be purchasing at these levels.
4. The company lost a major client with Lane Bryant that anniversaries right about now -- so the drag on results from the loss of that client is over -- helping to drive 2009.

It is not easy to pitch a stock that has consumer exposure in the current environment, but the data that came out today was expected and factored into the company outlook.

Know What You Own: Other stocks that may be of interest to readers of this column include American Express (AXP - commentary - Cramer's Take), Capital One Financial (COF - commentary - Cramer's Take), Orix (IX - commentary - Cramer's Take), Moody's (MCO - commentary - Cramer's Take), Discover Financial Services (DFS - commentary - Cramer's Take) and SLM Corp/ (SLM - commentary - Cramer's Take).

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At time of publication, Gillis had no positions in the stocks mentioned, although holdings can change at any time.

Colin Gillis is a managing partner at Click Capital -- a specialized research and consultancy targeting the Internet sector. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.