About - Synchrony Financial : SYF

Summary

Business

Synchrony Financial, together with its subsidiaries, operates as a consumer financial services company in the United States. It provides credit products, such as credit cards, commercial credit products, and consumer installment loans. The company also offers private label credit cards, dual co-brand and general purpose credit cards, short- and long-term installment loans, and consumer banking products; and deposit products, including certificates of deposit, individual retirement accounts, money market accounts, and savings accounts, and sweep and affinity deposits, as well as accepts deposits through third-party securities brokerage firms. In addition, it provides debt cancellation products to its credit card customers through online, mobile, and direct mail; and healthcare payments and financing solutions under the CareCredit and Walgreens brands; payments and financing solutions in the apparel, specialty retail, outdoor, music, and luxury industries, such as American Eagle, Dick's Sporting Goods, Guitar Center, Kawasaki, Pandora, Polaris, Suzuki, and Sweetwater. The company offers its credit products through programs established with a group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations, and healthcare service providers; and deposit products through various channels, such as digital and print. It serves digital, health and wellness, retail, home, auto, telecommunications, jewelry, pets, and other industries. The company was founded in 1932 and is headquartered in Stamford, Connecticut.

Moat & Earnings

Synchrony Financial is signaling quite clearly, in the third quarter, what kind of operational health and growth potential the company has. With such impressive diluted EPS of $1.94, such strong profitability tells you that Synchrony is doing a great job of turning revenue into earnings while resisting the urge to increase costs. Solid customer retention and acquisition, which supports sustainable revenue growth, the company has 70.4 million active accounts. The current rising demand for credit, along with the rising interest rates that are redounding to the bank, would definitely benefit from the 15.04% net interest margin, which indicates the sound supervision of loan products resulting in efficient lending and strong returns. Taken together, these metrics show that Synchrony is on solid ground to keep growing and to make for an attractive investment with an expanding but stable business model.

SYF's third-quarter results were mixed. Healthy profitability is evidenced by $789 million in net earnings and $1.94 diluted EPS in a relatively competitive environment. This is a 6% increase in net interest income, indicative that Synchrony is taking advantage of a positive interest rate environment by tapping its large consumer credit portfolio to drive earnings. The company’s core business is stable and still thriving as this growth in net interest income indicates. While retailer share arrangements decreased by 7%, that rate is worth noting as it may point to challenges in continuing or increasing relationships with critical retail partners. More positively, total other income rose 29% as a result of higher non-lending sources of revenue, including fees and partnerships. It is this diversification that is critical to mitigating reliance on interest income alone and which will help guard against uncertainty during times of market volatility or interest rate changes (going up or down).

SYF’s third quarter platform results show a positive trend across all of its loan receivables platforms, which is growing and diversified in its business lines. Especially promising is that the Health & Wellness segment grew 10%, which is quite a jump from last year. The performance of this segment may be a key area of future strength and may put Synchrony in a good spot as healthcare spending remains a focus in the U.S. economy. Other segments grew evenly as well, including Lifestyle + 5%, Digital + 4%, and Home & Auto + 3% year over year. Synchrony’s results reflect that it is able to reach disparate consumer needs across disparate verticals, minimizing any single-sector risk. Solid performance across multiple loan types was also seen across the Diversified & Value platform, which grew 3%, demonstrating the strength of the company’s strategy to build a broad-based portfolio. In particular, with Health & Wellness being a growth area to watch, this could be a long-term growth driver for the company.

The third quarter results show an increase of 38 basis points (bps) for both 30+ days past due and 90+ days past due loan receivables and an increase of 27 bps. This mild rise in delinquencies, while just that, is a sign for investors to watch, signaling a possible decline in the credit quality of Synchrony’s loan book. A more meaningful signal is the 90+ days past due increase over both the previous month and the same month last year. Specifically, it indicates accounts in deeper arrears that may or may not end up being written off or requiring provisions for credit losses.

The Q3 purchase volume was down, the company probably suspects that sales will increase seasonally — a buying spurt during the second half of the year as people spend money for holidays or other consumer activities. This is good news for investors, who get a positive signal that Synchrony now believes 2024 will end on a higher note than previously expected, as spending by consumers and a potential rise in retail activity help boost its outlook. The seasonal dollar increase expectation further supports this view, with volumes weaker in Q3, but that purchasing environment remains healthy and is expected to rebound in Q4. While the upward revision of the purchase volume outlook improves the company’s performance outlook, the lower Q3 results underscore that continued monitoring of consumer behavior is critical.

A PEG ratio below 1.0 typically suggests that a stock is undervalued relative to its expected earnings growth, and SYF's PEG ratio is well below the sector median of 0.74. This signals that the stock has strong growth potential relative to its current price. Its growth is solid but looking there is still room for growth and expand into new markets. Furthermore, SYF’s Price-to-Cash Flow ratio of 2.67 is substantially lower than the sector median of 11.28, pointing to the stock’s strong cash flow generation and suggesting it is undervalued based on its ability to produce cash. Its strong cash profile is a proof that the company is generating a significant amount of cash flows. These ratios collectively make a compelling argument that SYF represents a strong buy opportunity.

Risks

One risk to which Synchrony Financial Synchrony is exposed is the environment of interest rates and macroeconomic changes. Rising interest rates have increased its net interest income, but if consumer spending slows down or interest rates rise further, it may deteriorate its credit quality if loans become hard to repay. Higher default rates, therefore, and higher provision for credit losses would be expected to affect profitability. Regulatory pressure is another risk, especially as the company with such an expansive presence in consumer credit finds its way. Compliance costs may increase due to any change in lending regulations or new consumer protection laws, or lending opportunities could be reduced. Additionally, Synchrony’s reliance on retailers to provide credit partners makes it vulnerable to the risk of dependence on retailers, and in particular, the risk of disruption to its credit card base related to financial difficulties or ‘retail shift’ by key partners into alternative credit providers.

Conclusion

In the long term, they’re in a strong position: their profitability is solid, their operations are efficient, and a diversified portfolio with resilience against market volatility. A key strength is the company’s ability to grow net interest income in an environment of rising rates. As macro makes it appear more uncertain than ever to be up and running, Synchrony is doing the right thing and positioning itself to be even more successful. By and large, the prospect of Synchrony as an investment here in the long term is positive. The company has a great trajectory for growth, excellent operating efficiency, and a good revenue base with diversification that should propel stable, profitable growth moving forward.


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