We're now well into earnings season, and while we heard from the big banks earlier on, there have been several other interesting earnings reports over the past week.
In this episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel give listeners a rundown of earnings from PayPal (NASDAQ:PYPL), American Express (NYSE:AXP), Travelers (NYSE:TRV), Ameris Bancorp (NASDAQ:ABCB), and Synchrony Financial (NYSE:SYF). Plus, there's a new FICO scoring model coming soon, and several other key bank earnings in the week ahead. You'll hear all of this and more in this week's episode.
A full transcript follows the video.
This video was recorded on Oct. 22, 2018.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Monday, October 22nd. I'm your host, Jason Moser. Joining me in the studio via Las Vegas is certified financial planner, Matt Frankel. Matt, you are out there in Las Vegas. How's everything going so far?
Matt Frankel: Good! We're just getting warmed up. It's only 09:30 in the morning here. Everybody's just getting their coffee behind me. We're just getting going.
Moser: Alright, good deal! On today's show, we are going to talk about UltraFICO. Matt, you're going to tell us a little bit about what's going on out there with Money20/20 and what you have coming up. Of course, we'll tap into Twitter, we'll have One to Watch.
We're going to start the show with Earningspalooza. Earnings are in full effect, full throttle now. We're getting lots of them all week long. We've got a few companies here on the docket to talk about today. I wanted to go ahead and open up the conversation with PayPal, a company that all of our listeners are familiar with. I think it's a stock that you and I both own. At least, I own it. Do you own shares of PayPal, Matt?
Frankel: I did. I actually sold it. I had eBay, so I acquired PayPal shares through eBay.
Moser: Very good!
Frankel: I got rid of it a couple of years ago to buy Square, which turned out to be a pretty good move.
Moser: Not a bad move at all!
Frankel: Yeah, it's tough to argue with that one.
Moser: I thankfully own both. I think that when you look at the quarter PayPal turned in, you have to feel really good about what they're doing. This is really all about the dollars that are flowing through that network. Total payment volume for the company was up 24% to $143 billion. Engagement, which is essentially the number of transactions on the trailing 12-month basis, was up. Mobile payment volume was $57 billion. My takeaway from the quarter was that they're doing a lot of really good things. There's a reason why the stock spiked on this release. I think, generally speaking, you have to be pretty optimistic. What's your take, Matt?
Frankel: This quarter in my mind was all about Venmo. You mentioned payment volume was up 24%. Venmo's payment volume was up 78%. That's really what's driving PayPal higher. Not only that, but we mentioned in an episode a week or two ago that they're trying to start to monetize Venmo. They announced that one in four members can be monetized right now. That's up from 17% last quarter, and much less than that last year. Not only is Venmo growing, but they finally think they can turn it into a significant revenue stream, which is a lot sooner than anyone really thought that was going to happen. That's my takeaway on this quarter.
Moser: I was looking for any and all language regarding Venmo that I could find. I think you're right, that's the forward-looking picture with this company. I think it's worth noting, we talk a lot about Venmo. You and I spoke last week about the fee change on the instant access side of the business. We have to keep an eye on how consumers are going to feel about that ultimately. For me, it was worth noting that while the results for Venmo were good, $17 billion of that $143 billion was through the Venmo network, which was significant. They said that 24% of users are now participating in a monetizable action. That's all great news, but I think what could get lost in the conversation is the fact that PayPal on its own, sans Venmo, is still doing a really good job. To me as an investor, that's an even better outlook, really. You're looking at not only the power of the PayPal platform, but also the Venmo platform, other platforms like Xoom, for example. These guys have a lot of different ways to make it work. From an investor's perspective, that's a really attractive part of this business.
Frankel: Yeah, definitely. PayPal is growing really well on its own, which is impressive, considering how big PayPal is. PayPal has become just part of our language, like, "PayPal me." Everybody uses PayPal, it seems, but they're somehow still growing very, very rapidly.
Moser: I think I'm going to hang onto my shares, Matt. I'm going to keep my Square shares, too. Like we say every week, if we could shut up for long enough, I'm sure we'd both add to our positions. Maybe after earnings season dies down, we'll have a chance.
Let's jump into American Express real quick. You took a look at the quarter there. What stood out to you?
Frankel: A lot. American Express, as frequent listeners know, is the one that I'm always trying to get Jason to include in his war on cash basket. American Express is looking really good. They're taking advantage of this booming economy and consumer spending preferences. 16% year over year loan growth was what really stood out to me. They grew their revenue by 10% year over year. They grew revenue by 10%, they grew expenses by only 8%. Anytime you grow your revenue faster than you're growing expenses in banking is a really good thing.
They raised their full-year forecast, which surprised a lot of people because they're still, in a lot of minds, recovering from losing their Costco partnership, which they've now made up for and then some. Global consumer revenue was up 15% year over year. Speaking of PayPal and Venmo, along with their earnings announcement, they announced that they were entering into a partnership with PayPal and Venmo where people can pay their AmEx bills directly through the Venmo platform and send payments via AmEx through their PayPal/Venmo platforms. This should be another exciting revenue driver coming soon.
Not only this, Amex's delinquency rate and charge-off rates, which were already very low, in terms of the credit card industry, to begin with, are looking even better. So, not only are they growing loans at a double-digit rate year over year, they're doing so in what looks to be a very responsible risk management scenario.
Moser: One thing I did notice, too, was that it looks like they've updated their rewards program to become a little bit more enticing, compete a little bit more. That's what these card companies ultimately have to do, whether it's Visa or MasterCard or American Express. They need to give customers incentives to use the cards. One of the biggest incentives you can throw out there is a rewards program. I think that when you look across the spectrum there, American Express has always had a very compelling rewards program. I speak to this as a cardholder of 10 years. I don't own the stock, but I am a card holder, and I'm not going to get rid of that card, I don't think, ever. It's been a great one to have. Again, I think it always deserves an honorable mention for the war on cash basket. It was just on the outside looking in. But hey, who's to say we can't change that basket and add a little bit to it? Maybe we'll do that in 2019, Matt.
Frankel: If AmEx keeps growing like this, it'd be tough not to.
Moser: Let's take a look here really quick at Travelers. Everybody knows the red umbrella. Travelers Insurance's earnings came out. I made the joke last week -- for listeners who don't know, I actually moved up here and took the job at The Fool in 2010. The job that I left was with Travelers Insurance. I worked with Travelers for a year. It was a good job, it offered me a lot of opportunity to move up in the company. I made the joke that when I left, the stock was somewhere around $50. Now it's around $125, it peaked around $150. The bottom line was, I felt like I left the company in really good shape. Of course, that was a joke, because I didn't have anything to do with anything.
I do think this is a very good business. I'm surprised it's always flown under the radar of our services here. The fact of the matter is, if you invested in Travelers a decade ago, and you held onto those shares, you would be extremely happy. I think that is because the company is very focused on making sure they do right by their customers. When I was there, their core philosophy was, "Pay what we owe, and let's move on." They tried to reduce and eliminate as many of those frictional costs as possible when it comes to insurance. One of the big ones is subrogation, when you have claims that are disputed, and they go further down the line to lawyers and insurance companies battling each other. To me, that's a one-two punch there that makes it pretty compelling from the investor's perspective.
Net premiums grew 6%. The combined ratio is still performing very well. This year the underlying combined ratio was 93%. We always like to see that low number, under 100. That means they're writing good business. To me, there were a lot of good reasons to be optimistic about Travelers. I think investors in Travelers today could feel comfortable holding those shares knowing this is a well-run business that should continue to perform well for some time to come.
Also, I'll give one more look here to a company I follow, Ameris Bancorp. Ameris is a small little bank in Moultrie, Georgia. It's actually a part of that small business big investments basket that I put out recently. It's just a $2 billion market cap. I found it back in 2011, right at the peak of the financial crisis. You were a small-cap bank in Georgia, that was basically ground zero. I don't think a lot of people gave them a chance to survive. But the FDIC found that this was a very well-run bank and decided to use them as a partner in helping them roll up some of those failed institutions. Really, it's been a total assets story. It's been a story about assets and about deposits. Ameris has continued to grow that asset base and that deposit base. And that deposit base is really top of mind for them in the coming years. The efficiency ratio continues to improve, 60% last year down to 54% this year. Another ratio we like to see on the lower side. They are still assessing the potential for some loan losses from Hurricane Michael, which did roll right through that part of the country. But all in all, still performing very well. I'm very encouraged with what Ameris is doing and what the future holds for them.
One more here, Matt, Synchrony. Perhaps a name that not everybody is familiar with. Synchrony has a history with PayPal, too. Tell me what you saw in their most recent quarter.
Frankel: In my mind, we're saving the best for last here. I'm a big fan of Synchrony. I often refer to them as the biggest credit card company people have never heard of. Their core business is store credit cards. If you have a store credit card through, say, Amazon, it's a Synchrony card. My furniture, I bought at Rooms to Go was on a Synchrony card that was offering 0% financing. They have a pretty broad reach. Dozens and dozens of retailers issue their credit cards through Synchrony.
Synchrony is really firing on all cylinders right now. Store credit cards are a very lucrative business if they're done correctly. They charge higher interest rates than typical credit cards. Store credit cards tend to be in the 25-30% interest rate range, whereas regular credit cards average about 17% right now. While they have higher delinquency and charge-off rates, it's more than made up for by the additional interest income. To give you a number from their recent quarter, Synchrony's net interest margin is about 16.5%. That's what the average credit card charges altogether before expenses and charge-offs and things like that. Synchrony is doing a very good job of risk management, which is producing some pretty impressive margins.
They're also quietly growing their banking platform. They're becoming one of the biggest online savings banks because they offer higher interest rates. They don't have a branch network, so they can pass on some of the savings to consumers in the form of high-interest savings and CD accounts. Not only are they growing their business very quickly, they're funding it with low-cost deposits as opposed to borrowed money. Their business is looking good. They have a bunch of positive tailwinds.
I actually just met with Synchrony's leadership team here this morning. That was my first Money20/20 meeting at 07:15 in the morning. We got started off with a bang. They brought up a bunch of really good points that are going to be long-term tailwinds for the company. The CareCredit product, which is issued at a lot of physicians' and veterinarians' offices, things like that, it's supposed to be a healthcare credit card, is a Synchrony product. I'm sure a lot of listeners have noticed that over the past couple of years, more and more healthcare costs are being shifted onto the consumer. Whether we like that or not, it's a big tailwind for the CareCredit product, which offers people a very low-cost way to finance their healthcare expenses. CareCredit is becoming a bigger and bigger part of Synchrony's bottom line every quarter and should continue to do so.
They're also investing very heavily in technology, improving the customer experience, figuring out how different products work together. They're just recently rolling out their HOME card. They're pairing all of their home-oriented retailers that issue Synchrony cards into one. Same with Auto card, they're issuing a new credit card you could buy, say, gas, go to an auto parts retailer, anything you need for your car combining onto one store credit card product.
They have a lot going for them. Their quarter was very impressive. 14% year over year loan growth. 14% deposit growth. They're buying back shares at a breathtaking pace. They bought back almost a billion dollars of shares just during the third quarter. That's about 4% of their total. In one quarter.
They're taking advantage of this -- they lost a key partnership recently. Unfortunately, they lost their Walmart partnership. But if they're growing at a 14% rate, they're going to more than make up for that lost revenue in no time. They're taking great advantage of their depressed valuation. They're running a very efficient business. 31% efficiency ratio is unheard of in banking. Even for low-cost internet banks, that's very impressive. They're just making some really smart moves. Great margins, great profitability. I'm excited to see where they go from here.
Moser: OK. Investors, if you haven't heard of Synchrony, or if you've never looked into it, it sounds like, based on what Matt's told us here, get it on your radar. Synchrony. Thanks, Matt!
Frankel: Yeah, I know that was long, but I like Synchrony.
Moser: That's OK, you said a lot of good stuff. Listeners should only benefit from that.
Let's take a look at UltraFICO, which we mentioned at the beginning of the show. Over the weekend, speaking of American Express, one of the things I get with American Express is, every quarter, they send me my free credit report. I get this, and I can look through and dispute any problems or anything. It gives me my FICO score. And it always makes me feel good, because I take good care of my credit score. My FICO score is still good. So, I'm going to sleep at night, I'm feeling nice and safe and comfy in my home, knowing that the bank is going to keep lending me that money because I've got a good FICO score. Then, I wake up and read about this UltraFICO score. And now, I'm getting a little bit concerned.
This sort of piggybacks on the conversation we had last week in regard to the return of zero-down subprime mortgages. Essentially, Fair Isaac, the company that created and uses the FICO credit score, is going to roll out this new scoring system in early 2019 that essentially factors in how consumers manage the cash in their checking, savings, and money market accounts. It's basically another way for them to measure an individual's particular credit risk.
The whole idea behind this, it's not to make sure that they are lending to the best possible borrowers. What they're trying to do is expand the pool of borrowers and give more credit to more people, to grow that opportunity to lend to more people. I can't help but feel like maybe, between last week's story on the subprime mortgages and this week's UltraFICO score, I'm a little bit skeptical at first glance that this is a good idea.
You said that you're going to be speaking with these good people out there this week. Tell me a little bit about what you think about this UltraFICO score.
Frankel: It makes sense to a certain degree. When you go to open a checking account, they run a credit check on you. It's a product that you need good credit to get. You need to use your checking account responsibly to keep it open. So, it is somewhat a predictor of responsible financial behavior. But, at the same time, this is being used as a backup FICO score. Here's the idea -- if you go to apply for, let's say, a mortgage, they run your FICO score and say, "Oh, your score is too low. You don't qualify for a mortgage." You can say to this lender, if they give you the option, "Now check my UltraFICO score," which would take into account if you've had a checking account open for a long time with no overdrafts, no defaults. It would take that into account and potentially raise your score and allow you to qualify for a lending product that you otherwise wouldn't. So, it makes sense to a degree. But like you said, I'm skeptical. There's a reason that people with low FICO scores don't qualify for loans, it's because they generally don't have a very strong history of financial responsibility for one reason or another.
I'm approaching this with caution. I'm meeting with FICO's CEO, as you said, tomorrow morning. I definitely have a list of questions written down for him. I'm curious to hear what they say about it in more detail and the rationale behind it, which I will definitely be glad to share with our listeners next week, whatever I take out of that meeting. For the time being, I'm approaching this with caution. I like the FICO score system the way it is, simply put. I think it does a very good job of predicting consumer financial behavior. This seems more like a way to boost banks' lending pools a little bit more.
Moser: Yep. Bottom line is, I'm not going to change what I'm doing. I think I'll dance with what I've got, because it seems to be working so far. As we said at the top of the show, Matt, you are on location this week in Las Vegas at the Money 20/20 show. I know you get a chance to go to this show every year and look forward to interviewing CEOs and finding out what's going on in the world of finance and tech. Tell us a little bit about what you have coming up here this week, and what our listeners can look forward to next Monday.
Frankel: I mentioned I have the FICO CEO on my agenda for tomorrow. I'm meeting with some people from AmEx later today. I have Green Dot, one of my favorite fintech plays, which I'd love to talk about more next week.
Moser: Hey, now!
Frankel: [laughs] Just to plug a next episode. I have a bunch of good stuff going on tomorrow. We're going to walk the floor, see what's new in the world of fintech. There's over 1,000 companies presenting here, so I have my hands full. I can't wait to see what the conference has that I'll have to share with you guys next week.
Moser: That's great! We'll look forward to connecting on Monday and letting our listeners benefit from everything you've been able to do this week.
Let's tap into Twitter really quick. First up, we've got @MP_Fitzgerald. He says, "If it weren't for The Motley Fool, I'd never have prioritized having some cash on the side for times like these. Thank you, guys." Mark, thank you! We appreciate you listening. He was talking about all that volatility we've seen here the past couple of weeks. It sounded like he had a little dry powder. Glad we could help, Mark! Thanks for the kind words!
@JennysWave25. "In regard to Visa's recent dividend raise," you know, Matt, I was a little bit hard on Visa last week on Market Foolery regarding the dividend raise, simply because I feel like they could do a little more. Clearly, more of their money is going toward share repurchases. But, Jenny said, "I reacted the same way after reading about Visa's dividend hike. First thought, sweet! Looked at my holdings. Second thought, what the? $0.25? I'm trying not to be disappointed about more money." You know, Jenny, I guess that's the way we have to look at it. It's money in the pocket, right?
Final tweet for the week, from @DevonGSmith16. He asked a good question here. It's not necessarily so finance-related, though we've talked about Facebook (NASDAQ:FB) on the show before. He asks, "Is John Oliver's recent episode on Last Week Tonight enough to sell Facebook? I know it's entertainment, hilarious, but it sure didn't make me proud to be an owner of Facebook shares." Matt, he's talking about that commercial that John Oliver recently made for his HBO show. I'm assuming you got the chance to watch that?
Frankel: I did.
Moser: You did, OK. This is basically the one where it ends up, the ad slogan is, "Facebook: we're a toilet." He's very concerned about the fact that Facebook doesn't have much control over its platform, and a lot of fake news is spreading, and the impact from such fake news and lack of control.
I don't know that I look at something like that as a reason necessarily to sell. Now, to be frank, I don't own Facebook shares and I never will own Facebook shares. I'm just not a big fan of the company, not a big fan of the platform. I don't use their stuff. What's your take on that? If you see something like, would that be enough reason for you to sell?
Frankel: At the end of the day, like you said, John Oliver's a comedian. But there's a difference between being a socially responsible company and being a good business. That's what this boils down to. I don't own Facebook shares. Just like you, I would never. I'm just not a big fan of their business. Is the fake news on Facebook a social responsibility issue? Absolutely. Does that in itself make it a bad business and give you a reason to sell the stock? Probably not. Dig a little deeper into the fundamentals than just the fake news issue before you sell your shares. That's my feeling on it. John Oliver's a comedian -- a very good one, but at the end of the day, don't buy or sell any stock based on what any comedian tells you.
Moser: Yeah. His spot was really funny. We'll tweet that out on the Industry Focus Twitter feed later today so you guys can catch it.
Matt, as we do every week, we're going to wrap up here with One to Watch. Again, earnings season is in full throttle now. What is your one to watch for the coming week?
Frankel: I'm watching New York Community Bancorp (NYSE:NYCB), ticker NYCB. They're a regional lender based in New York. Their primary business is loaning out on rent-controlled New York apartment buildings. The reason that I'm really interested in what they have to say is, they're a business that does not react well to higher interest rates, in contrast to many banks. They have a higher cost of capital. Most of their deposits are interest-paying. Their loan portfolio is mostly these loans on rent-controlled buildings, and there's not much demand for those when interest rates start to rise. So, they're stuck with this portfolio of loans that were made when interest rates were really low. Their cost of capital starts rising. So, their stock has just been pummeled lately. Now it pays almost a 7% dividend. It should be a big beneficiary of the bank reform bill, because they're right in that $50 billion asset range that got deregulated. I was a shareholder. I got rid of it a little while ago, but I might jump back in, depending on when things look like they're going to start to turn around.
Moser: Great! I'm going to take a look at Markel Insurance (NYSE:MKL), ticker MKL. They're slated to release earnings on Wednesday the 24th. I'm sure most listeners are familiar with the name Markel. It's what we commonly refer to as our baby Berkshire, an insurance company built very much in that same mold. I own shares, very happy to own more if I ever get the opportunity to buy at a compelling valuation. And it, too, is a member of that small business big investment basket that I put out a little while back. I'll be interested to see what Tom Gayner and company have to say on Wednesday.
Frankel: I'll be watching that one. I own shares, too.
Moser: Excellent! Remember, always, you can reach out to us via email at firstname.lastname@example.org. Or, you can follow us on Twitter @MFIndustryFocus. And hey, while you're at it, let me tell you something here. Why not subscribe to The Motley Fool's newly renovated YouTube channel? You'll find clips from all of our podcasts, the entire family -- Rule Breaker Investing, Industry Focus, Motley Fool Money, Market Foolery, Answers, the whole kit and caboodle. I tell you, Dylan and his team have really done a good job building this thing out. It's really slick. Just go to youtube.com/themotleyfool. I think they put it best on Twitter -- "It's like podcasts, except for your eyes."
Matt, thanks for joining this week! Safe travels! Enjoy Vegas! Don't roll out of there flat broke, man! Draw a line somewhere, OK?
Frankel: [laughs] I'll try! I'm with a colleague who likes to gamble like I do, so neither one of us is the voice of reason. That's always an issue.
Moser: [laughs] That could get ugly. We'll talk to you next week. As always, people on the program may have interest in the stocks they talk about, and they Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This week, the show is produced by our man behind the glass, Mr. Steve Broido. Thanks, Steve! For Matt Frankel, I'm Jason Moser. Thanks for listening and we'll see you next week!