Synchrony Financial: The Overhang That Is

Jul. 28, 2018 7:53 PM ETSynchrony Financial (SYF)31 Comments
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  • Synchrony is not renewing its long-standing partnership with Walmart so investors are concerned about what this may mean for the company's long-term business prospects.
  • The loss of Walmart will have an impact and will likely be an overhang through mid-2019 but I do not believe that this means that Synchrony is a sell.
  • I plan to stay long the stock, do you?

Synchrony Financial (NYSE:SYF) has been in the news a lot lately. First, Warren Buffett's Berkshire Hathaway (BRK.A)(BRK.B) announced that it took a stake in the private-label credit card company and then, more recently, Walmart (WMT) announced that it decided to go with Capital One (COF) over Synchrony after years of being a partner. The Berkshire announcement was obviously positive news for Synchrony and its shareholders but, as you can expect, the stock has been under pressure since the Walmart news hit the wire.

SYF data by YCharts

As shown, the stock has been punished since Synchrony announced that it was not going to renew its contract with Walmart on July 26, 2018, but I believe that there are still reasons to remain long SYF.

The Overhang That Is

The Walmart deal will definitely be an overhang for Synchrony's stock through at least mid-2019 but it is encouraging that management is already focused on life without having Walmart in the fold. Management laid out two strategic options that Synchrony has once the WMT deal expires in 2019:

The two highlights are the most important takeaways for Synchrony and its shareholders. During the conference call, management spent a considerable amount of time explaining the potential impact of the contract loss (i.e., there are moving pieces that won't be known for some time) and, while losing a top customer is never ideal, it appears that not renewing the Walmart partnership simply made business sense for Synchrony. I believe that Ms. Margaret Keane, CEO, said it best during the conference call:

Last year we began discussions with Walmart about renewing our relationship. Although we competed aggressively to renew the program, we were unable to reach terms that would have made economic sense for our company and our shareholders. Instead we will focus on opportunities in other areas

This article was written by

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, BRK.B. 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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