Synchrony Financial Has A Great Story To Tell

Summary

• Synchrony's stock has performed extremely well so far in 2019 (after a tough 2018).
• Synchrony continues to report strong operating results, and its management team has done a great job changing the narrative.
• I am long Synchrony, and I plan to add to my position on pullbacks.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Get started today »

Synchrony Financial's (NYSE:SYF) stock has been lost in the shuffle, as the trade war and other macro concerns have taken center stage. However, SYF shares have recently made a comeback as shown by the fact that the stock has significantly outperformed the market so far in 2019.

Data by YCharts

The strong stock performance in 2019 has been great, but, in my opinion, SYF shares still have a lot of room to run. This company has faced stiff headwinds over the last few years, and as a direct result, the stock did not perform well in 2017/2018. Looking ahead, I believe that long-term shareholders should seriously consider staying the course because this company has a great story to tell.

Then To Now

Synchrony is a unique company that is a market leader in the private-label credit card space. The company was originally spun out of General Electric (GE) in mid-2014 and the stock performance has been lackluster since that point in time.

Data by YCharts

Prior to 2019, Synchrony was viewed as a unique company that had elevated risk levels (weak underwriting standards and a low-quality asset portfolio). And 2018 turned out to be a tough year for Synchrony's management team (notice the steep drop in the stock price) as analysts questioned the company's quality of its asset portfolio and how the business would perform during an economic slowdown. Enter 2019 and the thought that the U.S. would not be in a recession in the near[ish] future.

Synchrony has been able to report strong operating results so far in 2019, and more importantly, management has been able to positively impact investor sentiment after a year (i.e., 2018) that most shareholders likely want to forget about. As I recently described here, there are 4 main factors that has had a material impact (positive & negative) on Synchrony's stock - [1] asset quality concerns, [2] losing the Walmart (WMT) business, [3] expanding the PayPal (PYPL) partnership, and [4] having the backing of one of the best, i.e., Berkshire Hathaway (BRK.A) (BRK.B).

These 4 factors are still very much catalysts for Synchrony's stock today, but, in my opinion, the number 1 factor, i.e., asset quality concerns, is not the same type of risk factor that it was even a few quarters ago. In addition, the Walmart "ordeal" actually turned out to be not as bad as some would have you believe. As such, Synchrony should currently be viewed as a safer, better-positioned company than it was at this point in the prior year.

The Latest - Results Were Good From Top To Bottom

Synchrony recently reported Q2 2019 results that beat the top- and bottom-line estimates. The company reported EPS of $1.24 (beat by $0.10) on revenue of $4.2B (beat by $850M), which also compares favorably to the year-ago quarter.

Source: Earnings Presentation

The highlights:

• Net interest income was up 11% (driven mostly by the growth in loans receivables)
• Deposits were up $6.6B when compared to the prior year
• Provision for loan losses was down 9% (Walmart portfolio shuffle is coming into play)
• Announced significant capital return plans - a dividend increase of ~5% and a buyback program of $4.0B (represents ~18% of the company's total market cap)

What's not to like, right? Plus, the company reported strong growth metrics across the board.

Source: Earnings Presentation

However, there were some concerns raised over the company's asset quality metrics.

Source: Earnings Presentation

Notice the YoY increases for 3 out of the 4 metrics. This asset quality topic has been front-of-mind for a while now, and, as I previously described, I do believe that the risk profile for the company has indeed increased over the last few quarters due to deteriorating asset quality metrics. However, I still believe Synchrony is well-positioned to prosper in the changing retail space. But (and this is a big but), investors should definitely continue to closely monitor these metrics in the quarters ahead.

It also helps the bull case that SYF shares are attractively valued based on several key metrics.

Valuation

Synchrony's stock is trading at attractive levels based on its own historical metrics.

Data by YCharts

Additionally, SYF shares are still trading at a deep discount when compared to its peers.

Data by YCharts

Synchrony will not all of the sudden start trading in line with its peers, but I do believe that the gap should begin to close if the company's management team is able to stay out ahead of the asset quality concerns. This "catch up" trade will take time, but, if you ask me, a lot of the risk is already baked into the current stock price.

Risks

Synchrony Financial's asset quality concerns could come back into focus in late 2019/early 2020 and the bull case would definitely be negatively impacted if this were to happen. The company's charge-off rates have been creeping higher over the last few years, but I do not believe that this is a major risk, at least at this point in time. I would, however, closely monitor Synchrony Financial's asset quality metrics through at least 2020.

Additionally, key partnership losses would have a significant impact on Synchrony's business prospects.

Bottom Line

To be clear, the risk level for Synchrony has definitely materially increased due to the ongoing asset quality concerns, but, in my opinion, this company is still well-positioned for 2020 and beyond. Moreover, I believe that this company has a great story to tell. To this point, Synchrony recently announced that the company expanded its CareCredit network to include more than 8.5k Walgreens (WBA) and Duane Reade stores, in addition to offering new services through its partnership with PayPal. While neither of these announcements is needle-movers, I believe that they both show that Synchrony is still viewed as a mission-critical partner in the eyes of two key customers. Synchrony's story just keeps getting better.

And it is important to note that management is now paying you more to be patient (the dividend was recently increased to $0.22 or 4.8%) while the story plays out.

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.