The Rising Credit Card Stock You Haven't Heard Of

NEW YORK (TheStreet) -- Consumers love their credit cards, and KBW loves Alliance Data Systems (ADS) .

KBW analyst Sanjay Sakhrani on Thursday upgraded Alliance Data Systems to "Outperform," with a price target of $149, saying that "fundamental trends are extremely positive for the company given the pro-cyclicality of the three business segments."

ADS focuses on private label card lending through its World Financial Network subsidiary, and also runs loyalty partner programs and through its Epsilon subsidiary, provides a range of customer marketing, database, loyalty management, modeling and other data services.

As we discussed when looking at the February credit card master trust agreements, World Financial Network's private label card portfolios outperform the competition, when looking at average excess spread, which is a profitability measure showing how much of the portfolio yield is kept by a credit card secrutizer, after netting-out the securities' coupon rate, loan losses and servicing fees.

Sakhrani said that it's not always fair to compare excess spreads, because "during the downturn, some issuers including Discover (DFS) ) and American Express (AXP) provided subordination to their trusts, so their excess spreads are inflated by an effective subordination subsidy."

Then again, for Alliance Data Systems' World Financial Network card portfolios, Sakhrani said "there was no subordination," so the card lender's 24.43% annualized excess spread during February was a pure number. World Financial Network's excess spread was the highest among the major U.S. card lenders, despite also having a relatively high net charge-off rate of 5.43% and the highest 30+ days delinquency rate of 4.47%, because of the nature of its private label card business. Private label card portfolios typically see a higher level of revolving debt than bank-branded credit cards, boosting interest revenue.