Alliance Data Systems (ADS): Activist investor has a stake

Industry: Information Technology–Data Processing & Outsourced Services; PEG = 0.96; P/E = 13.8

Alliance Data Systems (ADS: Current Price 228.55) provides data-driven and loyalty transaction-based marketing services to businesses in a variety of industries. Recent acquisitions and new loyalty program initiatives are boosting sales and earnings growth.

The company increased sales in 14 of the past 15 years, and improved EPS (earnings per share) by at least 10% every year during the past 15 years. Sales and earnings increased 12% during the past 12 months, and will likely rise more than 12% during the next 12 months.

Alliance Data received some good news recently. Activist investor ValueAct Capital Management disclosed that it has purchased a 6.8% stake in ADS. ValueAct intends to open dialogue with Alliance Data management and board members to discuss how to enhance shareholder value. The investment by ValueAct is good news for ADS shareholders.

ADS is undervalued after considering the company’s low PEG ratio of 0.96. The company’s balance sheet is strong with almost $1 billion in cash, and the company’s price-to-earnings ratio of 13.8 is a tad high, but acceptable. ADS will likely climb 55% and reach my 354.42 sell target within two years. Buy ADS at the current price.