If you’ve applied for a credit card at a retail store such as Walmart, Target, or even J.C. Penney, you’ve actually become a customer for a business like Synchrony Financial (SYF), a leading provider of store-branded credit cards. It’s a company name that the average consumer probably won’t recognize immediately, but with brand partners that include Walmart (WMT), Lowe’s (LOW), Gap Inc. (GPS), Amazon.com Inc. (AMZN) and PayPal (PYPL), there is a very good chance that your own wallet may include one of their cards. And that’s not the only aspect of their business – they are actively investing in mobile apps and capabilities and expanding their online deposit services into a full-service bank.
At the end of July, the company confirmed they would lose a partnership with WMT that had lasted nearly two decades, that represents almost 20% of their retail credit card balances, and was one of its five largest programs. How big a deal is the loss? You might remember that in late 2015, American Express (AXP) ended a similar, long-standing partnership with Costco (COST) – prompting a quick drop of about 30% in the stock’s price by the beginning of 2016 that took the entire year to recover. The loss of WMT for Synchrony is almost certainly at least as big; and while the stock hasn’t responded quite as negatively to this point, the fact of the matter is that the stock is currently approximately 20% below its 52-week high at around $37 per share at the beginning of this year.
It’s an open, unanswered question as to whether or not the loss of WMT’s contract will have the kind of overhanging, negative effect that many analysts seem to fear; the deal will remain in effect until August of next year, and SYF is currently evaluating whether to sell the entire portfolio to a third party or to convert its accounts to general-purpose credit cards. There are advantages to both options: selling the portfolio would free up $2.5 billion in capital, a large portion of which the company has indicated could be used to repurchase shares, along with up to $350 million in cost savings. Keeping the portfolio means the company would free itself of its current revenue-sharing commitments with WMT, while they would still earn royalties on purchases made at WMT stores for three additional years after the deal expires. That doesn’t mean that losing the partnership isn’t significant; but it does suggest that the long-term effect may not really be as bad as once estimated.
As it stands, SYF is a business with an excellent fundamental profile, higher-than-normal profitability, and a compelling value proposition based on most measurements. The economy continues to show fairly broad-based health with strong consumer confidence, and that is something that bodes well for the immediate prospects of this kind of business.
Fundamental and Value Profile
Synchrony Financial is a consumer financial services company. The Company provides a range of credit products through programs it has established with a group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers. The Company’s revenue activities are managed through three sales platforms: Retail Card, Payment Solutions and CareCredit. It offers its credit products through its subsidiary, Synchrony Bank (the Bank). Through the Bank, it offers a range of deposit products insured by the Federal Deposit Insurance Corporation (FDIC), including certificates of deposit, individual retirement accounts (IRAs), money market accounts and savings accounts. The Company offers three types of credit products: credit cards, commercial credit products and consumer installment loans. The Company also offers a debt cancellation product. It offers two types of credit cards: private label credit cards and Dual Cards. SYF has a current market cap of about $23.2 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings grew by nearly 51%, while revenues growth was moderate, at about 5%. Growing earnings faster than sales is difficult to do, and generally not sustainable in the long-term, but it is also a positive mark of management’s ability to maximize its business operations effectively.
- Free Cash Flow: SYF’s free cash flow is very strong, at nearly $9.5 billion. This number has increased steadily since late 2015, from a little below $5.5 billion.
- Dividend: SYF’s annual divided is $.84 per share, which translates to a yield of 2.67% at the stock’s current price.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SYF is $19.52 and translates to a Price/Book ratio of 1.6 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.2, which gives value-oriented investors a long-term target price at nearly $43 per share, a level that would put the stock above its all-time highs at around $41 per share.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend until the beginning of the year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. At the beginning of the month, the stock bounced off of a trend low at around $29 per share to reach its current level. It is about $2 per share below its nearest resistance level at around $33, illustrated by the 61.8% retracement line. A break above that level is a minimum requirement for the stock to stage a successful reversal of its current downward trend. It is also about $3 above its immediate support level.
- Near-term Keys: The stock’s current price level isn’t very conducive to a bullish short-term trade right now; with only about $2 to resistance, and about $2 to support, the reward: risk profile just isn’t attractive for any kind of momentum or swing-based trade. If you like the stock’s overall fundamental strength, however, the long-term value proposition is extremely attractive. If you prefer to wait for confirmation of a downward trend reversal, look for a break above $33. A drop below $29 would create a new 52-week low and reconfirm the downward trend’s strength, with its next most likely support level around $26. There could be an opportunity in that case to short the stock or to work with put options.