Consumer financial services company Synchrony Financial (SYF) in Stamford, Conn., 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 COVID-19 pandemic hit the credit card issuer hard, forcing it to increase its reserve allowance, making large provisions for credit losses. Consequently, the company’s bottom line suffered. However, shares of SYF rebounded in 2021, with the company enhancing its capabilities with new partnerships and diversification strategies. SYF shares have gained 18.5% in price over the past year but have slumped 8% year-to-date. The stock declined marginally intraday to close yesterday’s trading session at $42.70.
Despite posting solid fourth-quarter earnings that matched expectations, the stock did not generate momentum. Its net interest income rose above forecasts, boosted by record purchase volume and loan growth across all sales platforms. For its 2022 outlook, the company expects continued strength in purchase volume across all sales platforms and anticipates moderation as consumer savings and payment rates decline. It also expects its net interest margin to be consistent with the second half of 2021, and proceeds from portfolio conveyance to create some excess liquidity in the second and third quarters. This could have a negative impact on its net interest margin (NIM).
Also, the company expects net charge offs and delinquencies to increase from current levels. In addition, it expects the current expected credit losses (CECL) transition to reduce CET1 by 62 basis points.
Here is what could shape SYF’s performance in the near term:
Significant Growth in its Last Reported Quarter
SYF’s net interest income increased 4.7% year-over-year to $3.83 billion in the fourth quarter, ended December 31. Its net earnings rose 10.2% from its year-ago value to $813 million, while its EPS increased 19.4% year-over-year to $1.48. Its provision for credit losses was down 25%, driven by lower net charge offs and lower reserve charges, including amounts attributable to HFS portfolios. And its average active accounts increased 5% compared to its year-ago value to 69.4 million.
Its efficiency ratio increased four percentage points from the prior-year quarter to 41.1%, and its net interest margin increased 113 basis points to 15.77%. However, SYF’s ROE decreased 0.6 percentage points to 23%.
Mixed Analysts Expectations
Analysts expect SYF’s revenue to decline marginally year-over-year to $3.60 billion in the quarter ending March 2022. However, its revenue is expected to increase 1.8% in the next quarter and 3.1% in the current year. But the Street expects a 9.8% year-over-year decline in the company’s EPS in the current quarter, 33.5% in the next quarter, and 23.8% in the current year. But it is expected to grow 35.9% per annum over the next five years.
Looks Undervalued at its Current Price
In terms of forward P/E, SYF is currently trading at 7.68x, which is 35.5% lower than the 11.90x industry average. Also, its 2.01 forward Price/Sales ratio is 39.3% lower than the 3.32 industry average. Its 5.94x forward Price/Cash Flow is 39.4% lower than the 9.81 industry average, while its non-GAAP forward PEG is 85.1% lower than the industry average.
POWR Ratings Reflect Uncertainty
SYF has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a grade of C for Momentum. This is justified because the stock is currently trading below its 50-day moving average.
SYF has a D grade for Sentiment, consistent with analysts’ expectations of declines in its revenues and EPS in the current quarter.
Among the 53 stocks in the Consumer Financial Services industry, SYF is ranked #18.
Beyond what I have stated above, one can also view SYF’s grades for Quality, Growth, Value, and Stability here.
View the top-rated stocks in the Consumer Financial Services industry here.
Bottom Line
SYF had a solid rebound over the past year and saw significant growth in its most recent quarter. However, Street analysts are bearish about its near-term financial growth. Also, the stock has a 24-month beta of 2.04, indicating volatility. Furthermore, investors are anxious about looming interest rate hikes. Although the financial sector tends to perform well as rates go up, “there’s danger in always saying this will happen,” cautioned CFP Douglas Boneparth, president of Bone Fide Wealth in New York. Thus, I think it could be wise to wait for a better entry point in the stock.
How Does Synchrony Financial (SYF) Stack Up Against its Peers?
While SYF has an overall POWR Rating of C, one might want to consider taking a look at its industry peers, Atlanticus Holdings Corporation (ATLC), OneMain Holdings, Inc. (OMF), and 360 Finance, Inc. (QFIN), which have a B (Buy) rating.
SYF shares fell $0.01 (-0.02%) in premarket trading Thursday. Year-to-date, SYF has declined -7.95%, versus a -3.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.
Synchrony Financial Stock: Is Now a Good Time to Buy? StockNews.com
