Consumer discretionary

Alliance Data Systems Corporation (ADS) Shares Have 50% Downside Potential: Citron Research

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Citron Research said Alliance Data shares could see their price halve over the coming months

Citron Research recently updated its thesis on Alliance Data Systems Corporation (NYSE:ADS) shares. In its report, the research firm warned investors of as much as 50% downside potential over the stock’s previous close.

After this report came out, the tech company saw shares close down 1.06% at $200.14. Despite this, 1.59 million shares traded hands yesterday, reflecting high volume. Regardless, Citron still thinks that the company has been wrongly categorized. It believes Alliance shares would plunge 40% soon.

The Street analysts believe that the company has intentionally misled people with hype. It has taken advantage of the bullish environment to become profitable, however, it does not deserve this. In its report, Citron Research stated: “At worst management is covering up a business that has an entirely different risk profile … and is one big credit event from derailing into a devastating downward spiral.” It has posed itself as being a software company which owns a bank, whereas in reality, it is the other way around.

The company’s claim of being a loyalty and data-driven marketing solutions provider were proven wrong. Citron believes that this claim would lead the investors to categorize Alliance as a services company. However, a recent note from Credit Suisse clears it out that a large part of this Texas-based company’s earnings come from the banks which operates it. The investors were largely fooled as the company was listed on the S&P technology sector index rather than the financial one, and the enterprise never bothered to correct that, representing mis-categorization which led it to enjoy higher valuations tech companies generally have. However, the company has been explicitly mentioned as part of the S&P 500 Ex-financials index.

With majority of its income coming from banking operations, the company cannot remain listed as a tech company. Moreover, it offers credit cards from a variety of retailers under the bracket of Comenity Bank. Citron went on to accuse it further as it said that Alliance management has itself been involved in deceptive promotion. Alliance CEO has repeatedly emphasized upon generation of free cash flow (FCF), but that is not its core focus. This is why the research firm has requested reevaluation of the company.

The data on FactSet Fundamentals says the consensus has 18 Buy, one Overweight, five Hold, and one Sell rating on Alliance shares. The Street also holds a $255.82 price target on the stock, reflecting 27.82% upside potential over the last close.

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