Alliance Data Systems (ADS) Stock Finds Strength in Numbers

We would buy lightly on this current weakness and add to longs above $300.
By Bruce Kamich ,

NEW YORK (TheStreet) -- When scanning for interesting charts I always follow the alphabet. Today the chart of Alliance Data Systems (ADS) - Get Report  looked promising.

This first chart of ADS is interesting because of the On-Balance-Volume (OBV) line which turned up in March, and only went sideways in August and September when ADS declined some $50. The OBV line broke out to a new high in October and November, foreshadowing eventual new price highs.

This longer-term weekly chart is also supportive of a bullish forecast. The OBV line is steady, the MACD oscillator has turned up and prices are above the 40-week moving average. We look for ADS to break out to new highs by year end. We would buy lightly on this current weakness and add to longs above $300. Use a sell-stop at $270 for now.

TheStreet Ratings team rates ALLIANCE DATA SYSTEMS CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

We rate ALLIANCE DATA SYSTEMS CORP (ADS) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 27.0%. Since the same quarter one year prior, revenues rose by 20.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has increased to $467.41 million or 22.94% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -11.39%.
  • 43.30% is the gross profit margin for ALLIANCE DATA SYSTEMS CORP which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 8.08% trails the industry average.
  • ALLIANCE DATA SYSTEMS CORP's earnings per share declined by 24.1% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ALLIANCE DATA SYSTEMS CORP increased its bottom line by earning $7.87 versus $7.43 in the prior year. This year, the market expects an improvement in earnings ($15.03 versus $7.87).
  • After a year of stock price fluctuations, the net result is that ADS's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • You can view the full analysis from the report here: ADS

Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of Jim Cramer, TheStreet or any of its contributors.

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