The answer to the question: what happens if you scrape the bottom of the value barrel?
The price is tumbling at the moment, today’s leg down apparently because they’re being ejected from the S&P 600 small cap index.
Presumably because their price and therefore market cap has fallen so much.
Which is mostly, it seems, because nobody cares about them: they are a recent spin off from Bread Financial Holdings (BFH) previously known as Alliance Data Systems (ADS).
Nobody likes small spin off positions, so their prices tend to slide for several months after the split.
This one has just kept on falling. They did lose a biggish client recently…
And now the index ejection–from the small caps, no less. How ignominious.
And yet, they own a most extraordinary business. You probably have to be Canadian to understand Air Miles.
Imagine nearly all the airlines and major retailers used the same fidelity points system. Including the government monopoly liquor retailer in Ontario, for example.
Far from being a growth darling, but it’s a good business.
In any case, the quick numbers:
Consensus earnings for this year: $1.10 (P/E of 3.1)
Consensus earnings for this year: $1.81 (forward P/E of 1.9)
So, round numbers, you’d probably make a profit if they lasted three years then simply liquidated.
It might not be a moon shot pick, but it sure sounds like a margin of safety.
A collection of things like this would probably make a most satisfactory portfolio.
And, well, it counts as a falling knife.
I believe it was spun off at $30 last November and traded briefly in the low $50s.
Very interesting intermittet spikes in volume lately.
The index ejection takes effect at market open July 5th, so that’s probably around the time to buy.
I read a couple of articles in SA including the earnings call which confused me on their business model. How exactly do they make a profit?
They talk about prebooking container capacity, supply chain disruptions, and derisking from SE Asia. Do they distribute merchandise as Air Miles rewards in addition to redeeming points for flights?
They also said:
What’s unique about the brand loyalty program, again, goes back to is primarily success-based. If we’re not delivering top line growth for the retailer, we’re not really getting paid and the product is coming back to us.
It doesn’t seem like a simple, low risk business of administering travel rewards, with no supply chain or inventory problems. Wouldn’t it be better to hand out Amazon or other store credits and let the retailers deal with fulfillment?
Also they have recently lost the second largest Canadian grocer as a client.
Shares of the Dallas-based consumer loyalty solutions provider plummeted on Wednesday after Sobeys, the second largest grocery chain in Canada and one of the company’s key partners, announced it is transitioning away from their mutual partnership. Instead, the company indicated it will partner with Scotiabank (BNS) and Cineplex (OTCPK:CPXGF) to launch a competing rewards program beginning in August.
It doesn’t seem like a simple, low risk business of administering travel rewards, with no supply chain or inventory problems…
It’s a complicated business.
Hey, at this price point, you usually get damaged goods.
The first thing ever sold on Ebay was a broken laser pointer.
You want a simple story too?? : )
Re the Sobeys, yes, that’s the problem with outsourced loyalty programs.
And white label credit cards too, the business of their erstwhile parent.
Clients hire you, then if they get bigger at some point they decide they could do it better or more cheaply themselves.
But there is always another client coming up the ranks.
In the company’s press release about losing the account they said there might be some silver lining to the cancellation–
they say they can now go after some clients they were prohibited from approaching because of non-compete agreements with Sobey’s.
Maybe the silver lining is smaller than the cloud, but any good news you can get I guess.
In a way the business isn’t all THAT complicated…they just have multiple lines of business.
Which they tend to describe with a lot of jargon, unfortunately.
Some of what they do is like the old Blue Chip Stamps business: sell “points” to retailers that their clients can use to redeem prizes.
There is usually a “float” aspect to that business.
Some of the rest is like an ad agency, and some like a service outsourcing firm.
I wish more firms would win Lucy Kellaway’s clear speaking award.
For years she gave out awards for the worst corporate jargon and MBA word salad, the Golden Flannel award.
But, just to show she wasn’t too negative, she briefly started handing out gongs for those who speak clearly, named for one Mr Wan Long.
She commented that Mr Wan “once uttered the clearest sentence ever spoken by a CEO”.
He runs a Chinese pork producer.
His description of their company mission: “What I do is kill pigs and sell meat.”
The first winner of the Wan Long award was an executive an BNSF (a Berkshire company),
who managed NOT to say that it was their mission to change the world and empower a journey of enlightenment.
Instead, he said “We move stuff from one place to another.”
Now, if we can just get Loyalty Ventures to try to describe themselves that clearly…
I’m located in Canada and knew a few folks who worked there a while back on the analytics side. It was a good business back in the day when loyalty (and related data and analytics systems) were novel-ish technologies. Most of that is pretty commoditized now with retailers wanting to setup their own loyalty programs to reap the benefits of first party data. Other big Canadian retailers like Loblaws and Rexall have done this already. It’s a popular trend among retailers.
So agree with Jim that it definitely is a falling knife. Everything has a price where I’d buy, but the industry trends on this are pretty scary.
I think they were spun off @ $46.5, and started trading (publicly?) on Nov 5, 2021.
At least that’s what I have in my notes from whem I recieved my spin-off shares, but I can’t remeber exactly where I got those numbers.
I purchased more yesterday @ $3.7.
I figured if they can maintain earnings above $1, as projected, the $3.7 entry price should end well for me.
I think they were spun off @ $46.5, and started trading (publicly?) on Nov 5, 2021.
Yes, I know that figure–I believe that was the bookkeeping value at the moment of spinoff.
I assume that was based on some accounting-based allocation of the value to the two firms to create two notional cost bases for everyone.
But the market trading started at around $30.
So, the “value at moment of spinoff” depends on what number you’re interested in.
If it isn’t for your tax return, the market value is probably more generally useful.
Most of that is pretty commoditized now with retailers wanting to setup their own loyalty programs to reap the benefits of first party data. … So agree with Jim that it definitely is a falling knife. Everything has a price where I’d buy, but the industry trends on this are pretty scary.
I don’t see it quite that way.
My baseline expectation has been that the core Air Miles unit is flattish, at worst sliding a bit because it’s perhaps past its peak.
They still have a formidable network effect.
A whole lot of people have no other non-airline loyalty membership, and IIRC more than half of households have an Air Miles account.
Turnover in clients isn’t fatal by itself.
Like store branded credit card services, the partners grow out of them, but others come along.
Ideally it’s like wealth management banks. They cater to the rich, but (surprisingly) rarely the super rich.
The super rich start up their own family offices.
That doesn’t mean catering to (and overcharging) the medium rich is a bad business or is going away,
or that some big clients leaving to go it alone is a sign of the end of the road.
I’d need more granular data about their client base than I have to have a firm opinion about the trajectory.
This is more my 1000 foot view (guess!), based on some tangential experience in the credit card side, and with friends in the house-label branding business.
They still have a formidable network effect. A whole lot of people have no other non-airline loyalty membership, and IIRC more than half of households have an Air Miles account. Turnover in clients isn’t fatal by itself. Like store branded credit card services, the partners grow out of them, but others come along.
That’s the scary part though, if the network starts getting smaller, the value goes down very fast. Although, I haven’t done any real analysis on this, it’s mostly anecdotal and based on industry trends. Perhaps it can be a cash cow for a while longer.
My base assumption is that every at-scale retailer will have their own loyalty program. It’s just too lucrative, correspondingly expensive to outsource. With every other retailer having their own card, it’s increasingly hard to gain mindshare, and thus market share for a coalition loyalty program.
My base assumption is that every at-scale retailer will have their own loyalty program. It’s just too lucrative, correspondingly expensive to outsource.
Bear in mind that the critical mass hurdle is different in the US versus other countries.
The US is a gigantic market. It’s easy to forget how atypical that is.
A much larger percentage of US industries are going to see the top few leaders big enough to do it all themselves profitably, and want to spend the time and energy to do so.
Elsewhere, that’s much less likely. Few industries would have a #2 doing well enough to want to go it alone elsewhere.
That’s why something like Air Miles never came into existence in the US. Big firms had no incentive to join a points network.
But for ~300 Canadian companies, it appeared to be the better choice.
Of course, Canadian Air Miles is far from everything they do.
They do business in quite a few countries, and they do a lot of consulting…BrandLoyalty works in 40 countries.
Presumably much of that work is for retailers doing their own loyalty programs.
Loyalty Ventures at $3.43. … The index ejection takes effect at market open July 5th, so that’s probably around the time to buy.
Well, today is July 5.
As predicted, the drop has continued. Price is now $3.24.
Now it’s just a question of whether the theory of the rebound is correct—but the odds are good, not just because of indications it might be cheap.
The average stock is an outperformer after index ejection, so it’s playing the odds.
For the effects of index churn in and out of the S&P 500, a blog post from Research Affiliates: "Over the 12 months following the rebalance, our research shows only 43% of additions finished ahead of their effective closing price relative to the market. Because stock prices can rise much more than they fall, this translates to only an average 1% loss relative to the market in the 12 months following the rebalance. Reciprocally, fully half of discretionary deletions finish the subsequent 12-month period ahead of their effective closing price relative to the market. Because the gains tend to be significantly larger than the losses, the discretionary deletions beat the market by nearly 20% over the next 12 months, on average. As a result, in the first six months following the rebalance, the additions tend to lag the deletions by 14%, and by month 12, the additions lag by 20%."
They note that a lot of index funds take a day or two to “catch up” with changes, so the bottom might not be for another day or two.
I suppose it’s worth mentioning Bread Financial, BFH, the erstwhile parent company of Loyalty Ventures.
Consensus of 14 analysts is earnings per share of $11.20 in 2022 and $11.97 in 2023.
With the price at $35.92, that’s a forward P/E of 3.001
Talk about being out of fashion : )
It seems nobody wants a credit card company right now, especially one that just lost a biggish client representing ~9% of their biggest operating business.
It seems to be a very bifurcated market.
About 23% of stocks are trading at under 10 times current earnings, something that happens only maybe 12% of the time.
Yet lots of others remain pretty insanely priced.
For some of those I picture a happy cartoon character who has run off a cliff, but not yet looked down.
Looks interesting - I may even have to break down and get an Air Miles card, to get some client experience. 2 of the 3 grocers in my town use the card, and one of the 2 pharmacies as well. As Jim says, Air Miles are ubiquitous in Canada.
As for the question of a temporary share price drop because of being dropped from the small cap index, does anyone have any insight into how a typical index fund would handle the upcoming announced index changes? For instance, if LYLT is going to be dropped from the S&P SmallCap 600 index on July 5th, and this is announced several weeks in advance, to ETFs and whatever funds are based on this index start selling LYLT shares as soon as this is announced, and how long do they give themselves to complete the change?
For instance, LYLT has 24.6m shares outstanding, with an average volume of about 726k shares traded every day, according to Yahoo Finance, which also shows an average volume about twice as high in the last 10 days, or 1.54m. If one guestimated that 10% of the shares are held by index funds, meaning they have to dump 2.5m shares around the time of the deletion from the index, then they could obviously not do this all on the day of July 5th, nor would they want to. If all the difference between their usual volume and their recent volume was coming from funds dumping the shares because of the index change, then that would suggest they are doing it over about 4 days, but it might be longer, if some of the extra trades are coming from people like the ones on this board!
As for the question of a temporary share price drop because of being dropped from the small cap index, does anyone have any insight into how a typical index fund would handle the upcoming announced index changes? For instance, if LYLT is going to be dropped from the S&P SmallCap 600 index on July 5th, and this is announced several weeks in advance, to ETFs and whatever funds are based on this index start selling LYLT shares as soon as this is announced, and how long do they give themselves to complete the change?
Based on the price results they report it seems they do most of it beforehand, but a few laggards seem to be doing it the first day after.
I don’t know when the change was announced for LYLT, but I will hazard a guess it was around June 8.
The average volume since then has been 5.5 times the average volume before then.
One big spike 7.2m shares June 8 (people jumping on the new trying to front run the funds???) and another spike of 4.6m shares July 1 (just before the change).
Average volume prior to that was about 300k shares.
They have $752M in debt which is more than 5 years worth of earnings. Does anyone know if there’s a way to figure out the maturity and interest rate of that debt?
Sorry for all the posts. I’m trying to learn as I go.
In the debt section, I see this: “Our total leverage ratio, as defined in our credit agreement, was 4.1 to 1 at March 31, 2022, as compared to the maximum covenant ratio of 5.0 to 1.”
Jim,
give it up
For whatever reason, ADS did not work out and LYLT will not either.
Whether it should, logically, or not, is irrelevant to reality.
It’s doomed. That’s just the way it is.
Jim, give it up For whatever reason, ADS did not work out and LYLT will not either. Whether it should, logically, or not, is irrelevant to reality. It’s doomed. That’s just the way it is.
Oh, I believe you at this point. For BFH as well as Loyalty.
A metaphor in the reverse direction:
I feel like a guy watching a large, confused buffalo and its newborn calf rise slowly into the sky for no evident reason.
No matter how much I at first thought they should fall to earth, we’re all now wagering that they will reach orbit.
As a mashup between Sonny Curtis and Martin Zweig, “I fought the tape, and the tape won”.
