Fintech is one of the megatrends which the corona crisis has given an extra boost. Whether it is contactless payment in retail, e-commerce bills settled via payment apps or online applications for private loans, many people are likely to have discovered the digitalization of the banking world for themselves by 2020. Accordingly, Fintech shares were very popular on the stock exchange. But there are companies that have fallen by the wayside. Alliance Data Systems turns out to be a real Fintech laggard. The US small cap is quoted at a good quarter below its 2019 close. At least the share is preparing to improve its balance sheet on the home straight of the stock market year (see chart). The Columbus-based company specializes in marketing and loyalty services. In addition to loyalty programs, Alliance Data offers credit card systems to its more than 400 customers, including the Victoria's Secret fashion label and the IKEA furniture store.
This strategy has not really taken off in recent years. In 2019, operating earnings (adjusted EBITDA level) slumped by a moderate double-digit percentage decline in sales. The margin shrank accordingly sharply (see chart). Since February 2020 Ralph Andretta has been responsible for getting Alliance Data back on track for growth. Even before the appointment of the CEO previously responsible for Citigroup's US credit card business, Alliance Data had already initiated a restructuring of the group. The sale of Epsilon was completed in mid-2019. The specialist for data management in marketing went to the French advertising agency Publicis for around USD 4.4 billion. Since then, Alliance Data has focused on the two segments "LoyaltyOne" and "Card Services".
Just a few months after joining the company, Ralph Andretta expanded the digital payment division through a takeover. He put USD 450 million in cash and treasury shares on the table for Lon Inc. This company offers payment services under the brand name Bread. The platform is positioned directly at the point-of-sale - mobile and online shops are just as much a part of this as stationary retail. With Bread, Alliance Data can now offer its customers the "Buy now, pay later" payment method in particular. In addition to purchase on account, this includes consumer loans or instalment payments. Almost simultaneously with the announcement of this transaction, which has now been completed, Alliance Data presented its interim report for the third quarter of 2020. This report reflects the recovery of business after the lockdown. In the card segment, credit sales rose 28% over the previous period to USD 6.2 bn. At the same time, "LoyaltyOne" increased revenues by more than one fifth. However, compared to Q3 2019, Alliance Data as a whole posted a double-digit percentage decline in revenues and EBITDA.
The prospects of the service provider depend to a large extent on how the pandemic develops in the countries and on the course of the world's largest economy. The analysts at Morgan Stanley have their thumbs up. According to them, the prospect of a Covid 19 vaccine provides a high degree of certainty that the recession will end next year. As a result, interest rates at the long end should rise, credit growth should accelerate and unemployment should fall. Within the banking sector, Morgan Stanley considers consumer finance providers to be the biggest beneficiaries of the positive scenario. Alliance Data is one of Morgan Stanley's top picks in this segment. For investors who do not (yet) share the optimism, Leonteq offers an investment alternative in the form of two new Softcallable Barrier Reverse Convertibles. The duo with a uniform term of 15 months brings high coupons: While the guaranteed payout in the product currency is CHF 15% p.a., the USD variant yields 120 basis points more p.a. The barriers are fixed at 55% of the initial level. If this cushion does not hold, the partial protection expires. Investors would then be exposed to the full price risk of the underlying instrument.
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