Give Alliance the Benefit of the Doubt

 | Jun 03, 2014 | 7:40 AM EDT  | Comments
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So you want revenue growth, do you? Organic, double-digit revenue growth? Are you willing to pay to get it? Are you willing to suffer through short-term pain in order to get long-term gain?

That's the question facing shareholders of affinity credit card and marketing company Alliance Data Systems (ADS). Alliance is the company behind a great deal of store credit-card businesses, and it also runs the frequent-flier programs for many airlines. It has a terrific target-marketed business that demonstrably raises the sales of client companies vs. that for non-client companies -- by a factor of more than four.

Alliance has also doubled the size of its business over the last six years, and during those six years its revenue has grown at a compound rate of 11%. What an amazing feat, considering the Great Recession and its aftermath. For 2014, the company is guiding to an outstanding rate of 22% revenue growth, with targets for 14% core earnings growth and 22% core earnings-per-share growth.

But the last quarter missed. There were some lines that were weaker than expected, and they including that for a brand-loyalty program. Still, though, I would say the principal reason Alliance missed was that it has been on a huge hiring spree in order to ramp up many of the programs it has won. It is building U.S. call centers, which are far more expensive than ones in India -- because Ed Heffernan, the CEO, who has generated a 500% return in the stock over the last five years, thinks the U.S. customer wants to talk to Americans. He has demonstrated time and again that that has been the case.

But 1,000 people cost money. The training costs money. Ed said on Mad Money last night that the costs will produce earnings in the second half of the year. Judging by the way the stock was hammered after that last quarter, many shareholders and ex-shareholders don't believe him.

I think he deserves the benefit of the doubt. He has built a genuine powerhouse that does much more for clients than a bank can do. He helps them with marketing, and not just on the banking side. Plus, if you think interest rates are going up on U.S. Treasuries, you can be confident he will make shareholders a tremendous amount of money just playing the rate game on the cards.

To me, Alliance is a huge buy because Heffernan has earned the trust. I feel lonely on this one. But that only makes me feel better about it.

Alliance Data is worth the risk, especially as the disappointment is now built into the stock. I'd grab it before it goes higher in the back half of the year.

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