Make a analysis of Dell's strategic potential

or

Make a description of situation of AIMCO $($case$)$ and your forecast of

development

Uncertainty in AIMCO from lower interchange fees and smaller$-$than$-$

expected international earnings $-$ Is AIMCO taking off?

The share price of the Canadian loyalty program company, AIMCO, an initial

public offering $($IPO$)$ last year, has taken a nosedive from $C$$$17$ to $C$$$10$ per share

due to not meeting analysts' earnings expectation. During IPO last year, AIMCO

had completed a transaction with a major credit card company to offer air miles to

the credit card company's existing customers. At that time, AIMCO greatly

enhanced the benefits to its air mile members by negotiating an increase in available

seats with a major commercial airline company. However, the increased availability

has put upward pressure on costs for AIMCO. At the same time, AIMCO was only

able to secure a marginal increase in price per mile paid by the credit card company.

There is a timing issue associated with the new deal. As air miles members

can now as a whole use many more miles that they earn due to the increased

availability, this put significant pressure on AMICO's earnings. AIMCO must now

spend an increasing amount to satisfy redemptions even as it may be selling fewer

miles to the credit$-$card issuers. This is expressed as a "burn$-$to$-$earn" ratio. This ratio

is now working against AIMCO.

During the past year, competitions have been fierce as other credit card

companies started their own self$-$insured programs which added the flexibility of

reimbursing their members with the costs of any air travel seats. As competitions

intensified, the interchange fee, which are the fees that help card issuers cover the

various costs including the costs of loyalty programs, have decreased from $2\%$ to

$1\mathrm{.}5\%$ for the next five years. AIMCO and the analysts expect card issuers to absorb

the blow by cutting the amount they will pay for the air miles. This decrease in

interchange fees have called into question AIMCO's estimates of free cash flow as

the AIMCO's agreement with the credit card company allows AIMCO to "share the

pain" of an interchange cut. AIMCO estimates about $C$$$100$ million of gross billing

may be at risk if $100\%$ of the cut in interchange fees are passed through to AIMCO.

With a $50\%$ share, the target estimate will result in $C$$$50$ million of lost free cash

flow.

In addition, the currency exchange may also present an issue for AIMCO

which operates internationally. The recent decline in Canadian dollar puts a huge

cost pressure on AIMCO's US operation which locked in their pricing exchange rate

last year without hedging their pricing exchange rate.

All of the above factors have resulted in the earnings estimate to drop from

the $C$$$17$ to $C$$$10$ target, with a negative outlook if existing competitions and drop

in Canadian currency exchange rate continue to persist. Investors should expect

AIMCO to sit on the runway for some time before any potential takeoff.