After a strong finish in 2016, Synchrony Financial (NYSE:SYF) has had a troubling 2017. The year started out ordinarily, flattish for the first couple months before a decline coinciding with the abundance in negative headline fueling concerns about retail’s demise ensued. As of this writing, the stock is down almost 20%.
SYF isn’t a retailer, but being the leader in private label credit cards (PLCC), also known as store-branded cards, many of its partners operate in the traditional retail sector, which has led people to indiscriminately drop it based on its exposure.
Yet, when the market sold off, guess who was scooping up shares? Warren Buffett and Seth Klarman, both value investors with long time horizons. Buffett has quipped before that his “favorite holding period is forever,” indicative of his willingness to ride out short-term bumps in return for sustained long-term shareholder returns.
Times may change, and thus business conditions will as well, but Buffett has stuck to his line. He still owns The Coca-Cola Co (NYSE:KO) and Wells Fargo & Co (NYSE:WFC), which were already in his portfolio in the early 1990s.
Synchrony will survive the retail shakeout. And at current prices, SYF is simply too cheap to ignore. Klarman’s requisite “margin of safety” box can be checked.
SYF Stock at the Moment
Even while shares tanked, Synchrony continued to show positive results. New partnerships were signed (Zulily), programs with auto brands were launched), and key relationship was renewed.
Loan receivable increased 11%, net interest income showed 13% growth year-over-year, and net charge-offs were down, a promising confluence. Meanwhile, liquidity looks healthy, and the dividend program (begun last year) has been upsized. Share repurchases too, have been announced.
And while a 2% yield may not be exceptionally enticing, I would expect future gains to be capital gains rather than income-based anyway, so this is just icing on the (relatively de-risked) cake.
Buffett loves to buy when companies are “on the operating table.” Temporary dislocations in price often make for attractive opportunities to buy into a stock that otherwise would be too expensive for comfort. But Synchrony ’s underlying business is very much intact. So, you’re getting the valuation discount without the turnaround risk.
On the sole basis of trading at 11x trailing earnings, SYF is worth at least another look.
Synchrony’s Levers
There are multiple areas where SYF grow earnings and restore confidence in the resilience of its business.
Most obviously is e-commerce, which is still a small piece of its sales. Online sales growth and penetration have been improving noticeably (PDF). From 2014-2016, penetration increased from 18% to 23% and online growth was up from 18% to 26%. SYF’s early investments in its digital capabilities will pay dividends in the coming years as the shift to digital wallets takes place. Their services are already integrated with Apple Pay, Samsung Pay, and Android Pay.
Synchrony’s online bank with its steady direct deposit growth will be another source of continued earnings growth. Enhancing the Bank Perks program and introducing new products (bill payment, small business deposit accounts, etc.) are low hanging fruit that will further the upward trend.
Some have been concerned that the credit growth has come at the expense of quality, meaning lax underwriting standards to increase Synchrony ’s loan book. In fact, the opposite holds true. Based on FICO scores, Synchrony has been underwriting higher quality consumers. 72% of loan receivables have a FICO score greater than 660.
So, what you’re getting is a growing business with e-commerce tailwinds, visible earnings drivers, a strong portfolio, and most importantly, extremely attractive valuation. It’s no wonder that SYF stock has caught Buffett’s and Klarman’s eyes.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
