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1 Highly Profitable Financial Stock to Watch

By Motley Fool Staff - Oct 24, 2018 at 9:57AM

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This under-the-radar credit card company is looking extremely attractive.

With double-digit growth, great efficiency, and outstanding profit margins, Synchrony Financial (SYF 5.05%) is a financial-sector stock that belongs on your watchlist. In this segment from Industry Focus: Financials, contributor Matt Frankel tells us why investors should pay attention to this lesser-known credit card business.

A full transcript follows the video.

This video was recorded on Oct. 22, 2018.

Jason Moser: 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.

Matt 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.

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