Analysts' Choice: Give Synchrony Some Credit

2/27/2017


  Recent Price
$37
  Dividend
$0.52
  Yield
1.4%
  P/E Ratio
14
  Shares (millions)
824
  Long-Term Debt As % Of Capital
59%
  52-Week Price Range
$38.06 - $23.25

Synchrony Financial ($37; SYF) focuses on issuing private-label credit cards to high-quality consumers. Its roots date back to 1932, when General Electric ($30; GE) created a division to help shoppers finance appliance purchases. That division issued a GE-branded credit card in the 1970s and eventually offered its services to retailers.

Spun off from GE in November 2015, Synchrony is generating strong operating growth at an attractive valuation. The stock earns a Quadrix Overall rank of 93. Synchrony is a Buy and a Long-Term Buy.

Business breakdown

Synchrony provides private-label credit cards (74% of total company interest and fee revenue, 68% of loans receivable) to about 25 retailers in the U.S. and Canada. These cards let retailers avoid paying interchange fees on transactions. They also aim to improve shopper loyalty and have become an increasingly important source of revenue for many retailers, as Amazon.com ($856; AMZN) squeezes their traditional business. But Synchrony plays both sides of the field — online retailers Amazon.com and PayPal also number among its partners. Synchrony says the average length of its relationship with retail-card partners is 19 years.

Besides private-label cards, Synchrony offers loans to consumers for large purchases (12% of revenue, 21% of loans) and elective medical procedures (12%, 11%). To help fund these loans, the online-banking business has $52.0 billion in deposits, up 20%.

In 2016, Synchrony topped its own expectations for growth in loans receivable, up 12%, and net interest margin, now at 16.0%. Synchrony's 2017 outlook appears conservative. It expects loans receivable to increase 7% to 9% organically, consistent with organic growth generated by Synchrony over the past five years. Higher wages, new retailer deals, or portfolio acquisitions could push actual growth for loans receivable above 10%. The company expects a net interest margin of 15.75% to 16.0% for the year, though that guidance has upside if the Federal Reserve raises rates more than expected by the end of 2017.

Although its net charge-off rate may worsen slightly in 2017, Synchrony notes that charge-offs were unusually low last year. The company takes a fairly conservative approach to extending credit; only about 5% of its customers score in the bottom quintile of FICO scores (600 or less).

Conclusion

Synchrony shares have surged 34% over the past 12 months, outpacing the S&P 1500 Index's 24% advance. The stock still looks reasonably priced at 14 times trailing earnings, well below the sector median of 19.

Synchrony's per-share profits are projected to climb 13% to $3.05 this year, ahead of its sector's expected median growth of 8%. If the company merely meets the most conservative estimate of $2.97 per share (implying 10% growth) and its trailing P/E ratio rises to 16, the shares will rally 28% over the next 12 months. Synchrony has topped the consensus profit estimate in 10 straight quarters.

An annual report for Synchrony Financial is available at 777 Long Ridge Road, Stamford, CT 06902; (203) 585-2400; www.synchronyfinancial.com.

SYNCHRONY FINANCIAL
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '16
0.70
vs.
0.65
12%
29.33
-
26.09
11 - 10
Sep '16
0.73
vs.
0.69
12%
31.97
-
23.25
12 - 9
Jun '16
0.58
vs.
0.65
9%
31.23
-
23.74
12 - 9
Mar '16
0.70
vs.
0.66
11%
34.60
-
26.28
13 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
15.12
2.71
0.26
37.31
-
23.25
14 - 9
2015
13.62
2.65
0.00
36.40
-
27.92
14 - 11
2014
12.73
2.78
0.00
30.64
-
22.60
11 - 8
2013
11.81
NA
NA
NA
NA
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
76
86
72
57
50
77

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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