Synchrony: Asset Quality Is A Risk But It Is Not A Showstopper

Jun. 02, 2017 7:22 AM ETSynchrony Financial (SYF)7 Comments
WG Investment Research profile picture
WG Investment Research


  • SYF shares are down ~30% on a YTD basis.
  • The company's asset quality is a concern, but it is already baked into the current stock price.
  • SYF is a long-term buy at today's price.

Synchrony Financial's (NYSE:SYF) stock price took a big hit when the company reported disappointing Q1 2017 results, and SYF shares are still down double digits since the financial results were released.

(Source: Nasdaq)

The company's Q1 2017 EPS of $0.61 missed the consensus bottom line estimate by ~16%, but, more importantly, Synchrony's earnings were down by $0.09, or ~13%, YoY. The Q1 2017 earnings were negatively impacted by a buildup of reserves and there is no denying that Synchrony's asset quality is a near-term concern, but I believe that Synchrony is still worthy of your investment dollars.

Synchrony Is Attractively Valued, Even After Factoring In An Additional Reserve Build

The management team has shown the ability to grow Synchrony's business since going public in mid-2014, as the company's net interest income, after retailer share arrangements has increased from $8.7b to $10.6b over the last two years.

(Source: 10-K)

There are several factors contributing to Synchrony's impressive top line growth but one of the biggest factors, in my opinion, is management's proven ability to outperform the market in a growing industry. To this point, management provided a few slides during the Q1 2017 Investor Presentation that shows the areas where Synchrony has been one step ahead of its peers.

Synchrony's past results have been impressive and the company's growth prospects are encouraging when looking out over the next few years, but that does not mean that it has been smooth sailing for this private-label credit card company, especially over the last two to three quarters.

Synchrony's asset quality issues have been highlighted over the last year and they are largely related to relaxed underwriting requirements from prior years but the company has recently emphasized the importance of maintaining a disciplined underwriting approach. As a result, the company has improved the quality of its

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WG Investment Research profile picture
Our President and CIO is a CPA with experience in public accounting and the financial services industry. He earned his Master of Accountancy degree in 2008 and his B.S. in Business Management in 2007. He is also a Level III CFA candidate. He has been intrigued by the market from the start. Over the years, he has learned that long-term investing is a discipline that, if followed, will help contribute to building lasting wealth. As such, most of our articles will be about the investments that we plan to hold for at least 3 to 5 years, as long as the company's story does not change. As a Seeking Alpha contributor, our main goal is to write about the companies that are key to our portfolio with the hope of promoting discussion (for or against the investment) from others within the SA community.Please visit our website for more information about W.G. Investment Research LLC.

Disclosure: I am/we are long SYF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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