Adding another short to hedge my mostly long CAPS portfolio
I have been looking for another short or two to hedge my mostly long CAPS portfolio and Alliance Data Systems (ADS) is one of the winners, or losers I suppose I should say. Barron's recently published a piece on the company titled "Industry Leader or Shaky Credit?" This is actually the third decent article that I came across in this week's Barron's. That must be some sort of record.
First a little background. Alliance Data Systems is essentially a highly leveraged credit card company. Alliance provides the affinity credit cards for a number of retailers, including stores like Victoria's Secret and Charming Shoppes.
All the way back at the beginning of the credit crisis Blackstone (BX) actually offered to buy ADS for $81.75/share, but it eventually withdrew the offer. Shares of the company have bounced around ever since dropping all the way to $25/share and rising again to $78/share before settling in at its current $56.50.
Now this trade certainly isn't a secret, nearly 25% of the company's shares have been sold short, so at some point we could see a short squeeze, but a bad company is a bad company and the way the article makes it sound these guys are in rough shape.
As of March 31st, Alliance Data Systems' book Its book value was a negative $1/share and its tangible book value is negative $27/share. The company has a negative book value. Not only that but at the end of 2009 it had around $2 billion in debt versus only $1 million in cash on its books. The Company's primary source of liquidity has been a $204 million bank line of credit.
The Barron's article contends that on a sum of the parts basis, ADS is worth no more than $30/share.
ADS's credit card business appears to be deteriorating and it uses aggressive accounting practices. For example, Alliance runs a Canadian customer-loyalty program called Air Miles. ADS assumes that a whopping 28% of the points that it issues to people who are enrolled in this program will go unused. Twenty-eight percent. American Express (AXP) runs a similar type of program and it assumes that only 10% of the points that it issues will go unused.
Another example of the company's aggressive accounting is its recent purchase of a credit-card portfolio from Charming Shoppes. Once it had the portfolio on its books, it immediately revised its estimated market value upwards for a $21 million gain.
Last month ADS disclosed that it has amended the terms of a $700 million bank that it has so that it is no longer required to pay any principal or interest until the loan matures in 2012. The people who are bearish on the company see this as a sign that it is having serious financial problems.
Add a federally-mandated reduction in credit card fees into the mix and a consumer that still reeling and you have one messed up company. I recently went short ADS in CAPS at $59.09/share.