Loyalty is a word most commonly applied to soldiers and friends. But it also has been adopted by the credit card industry in its never-ending quest to keep and grow business with us.

That is where the excellent growth company Alliance Data Systems (NYSE:ADS) comes in, as it provides loyalty marketing services to over 120 million credit card users around the world.

Never heard of Alliance? Well, you probably come into contact with it all the time anyway without knowing it. The company provides card services to issuers in virtually every industry, including specialty retailers, petroleum retailers, utilities, supermarkets, pharmaceutical companies and financial services providers.

Through three programs — Alliance Data Retail Services, LoyaltyOne and Epsilon — ADS has created an ingenious closed loop in which it helps issuers with billing, processing and securitization of their receivables while providing marketing support and strategic planning.

Basically, if you want to issue a credit card to customers, you can turn over the whole project to ADS, then just sit back and count the money.

Click to EnlargeAlliance Data Retail Services provides credit and marketing solutions that include private label, co-branded and commercial credit cards. It manages credit card services for retailers like Victoria’s Secret, Eddie Bauer and Pottery Barn. This division also devotes some time to creating targeted programs to increase the loyalty of their client’s patrons.

The company’s LoyaltyOne division designs and manages loyalty marketing services — consumer data, customer-centered retail strategies, direct marketing and loyalty consulting — for more than 100 North American brands. These efforts include Air Miles, which is the largest Canadian loyalty rewards program, with more than 9 million customers, or two-thirds of Canadian households. The division designs strategies for Fortune 1000 clients, and works with another ADS unit to create campaigns that transform short term customer behavior — essentially turning one-time shoppers into long-term relationships.

Finally, Epsilon is a marketing service firm that specializes in data-driven, multichannel marketing solutions that leverage consumer data to create loyalty. This is how you get pitches for hotels in the mail if you buy an airline ticket on your credit card.

Morningstar analysts believe that ADS has carved itself an effective niche by dominating this neck of the credit card industry as loyalty programs create a symbiotic relationship between customers and companies. In other words, customers unknowingly seek credit cards for whom ADS is in the background for their access to rewards like discounts and free flights.

These relationships create “stickiness” for accounts, as people do not want to give up the benefits they are receiving from their plans.

Besides charging companies for services, ADS is able to collect a small fee for every “point” that is awarded through its loyalty plans. Also, revenue automatically jumps whenever ADS acquires another merchant, or consumer spending increases for any reason.

ADS’s strongest revenue stream is largely based on its ability to fund receivables, however, as the firm securitizes them for a profit. So any downturn in the securitization market will hinder growth. Because of this, Morningstar believes that ADS is overleveraged, and this could one day result in a liquidity crisis.

All of ADS’s financial benchmarks have increased over last year. In the third quarter of this year, ADS earned $94 million — 77% greater than last year. Revenue increased 20% over last year, operating expenses increased 16% and EBITDA increased 33%. In comparison with this time last year, ADS’s Epsilon segment increased revenues by 46%.

Currently, 41% of ADS’s revenue came from its top 10 clients, which leaves some investors worried about the impact that would be felt if one of these companies were to defect.

Despite the leverage and small risk of a fallout, ADS shares have performed well, rising 325% since March 2009, as shown in the chart above.

The growth in the credit industry, the comprehensive range of services and the “stickiness” of accounts make ADS a reliable addition to your portfolio.

For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage, or his long-term investment service, Strategic Advantage.