We all invest for different reasons, and we all have different goals, metrics, and ways to narrow down our research in the process of buying a new stock. Like most investors, when I add a new position to my portfolio, I do a significant amount of due diligence to determine if the investment is warranted.
To me, there is one stock out there right now that checks off all my boxes and looks like a great buy: Synchrony Financial (SYF 1.12%). Here is why this credit card issuer is the next stock Iʻm going to buy.
Synchrony Financial is the 10th-largest credit card issuer in the U.S., with a 2% market share. Synchrony is different from other credit issuers -- banks that provide the loans for credit card purchases -- in that it primarily offers store-branded credit cards, those that can only be used for purchases at that specific store, with rewards and benefits as an incentive.
The bank offers more than 100 store cards, including the Amazon.com Store Card, used only for Amazon purchases. It has cards with American Eagle, Gap, Walmart, and Midas, to name a few. It also has around 30 cards that are store-branded but are part of the Visa or Mastercard networks, so they can be used anywhere. These include offerings for PayPal, Banana Republic, and eBay.
Last year was a rough one for Synchrony due to the pandemic and the resulting economic shutdowns across the U.S. Consumer spending was down for a variety of reasons, from closed stores to lost jobs. Consequently, Synchrony saw earnings plummet in the first three quarters of the year.
But they did recover in the fourth quarter to $738 million, a slight increase from the fourth quarter of 2019. It was due to essentially flat purchase volume on the cards, lower provision of credit losses due to the improving economy, and an aggressive expense reduction initiative in 2020 that lowered expenses by 7% year over year. As a result, the stock price surged in the fourth quarter and finished the year essentially flat.
That positive momentum has carried over into 2021, as the stock is up about 17% through Wednesday's close. The first-quarter gains are due to the improving economic conditions, buoyed by the stimulus and the rollout of vaccines, which have generated more consumer spending. Still, the stock remains a solid value, trading at about 18 times earnings with a price-to-book ratio of 2.
Good financials, and catalysts
Another reason I like Synchrony is its solid financials. As it is an online bank, it has no branch offices and relatively low overhead, which results in high operating margins, lots of cash flow, and a low efficiency ratio of 37%. The efficiency ratio measures expenses compared to revenue, so a lower efficiency ratio means the company is spending less in relation to revenue earned. That produces a high operating margin of 37% and a substantial amount of cash flow, roughly $7.5 billion.
This is a sturdy financial foundation on which to grow, as consumer spending is expected to take off in 2021, mainly toward the latter half of the year and into 2022. Synchrony has also been steadily adding new partners. It signed 25 new deals in 2020, including with Walgreens, Verizon, and Venmo, which is PayPalʻs mobile payments app. The Venmo Visa card, in particular, could be a significant revenue driver for Synchrony, given its huge (roughly 47 million) and growing number of users. In addition to the card, it has a QR code for contactless payments in store.
It is no wonder that analysts are bullish on Synchrony, given its financials and value, along with the improving macroeconomic picture and major catalysts. This looks like the next stock Iʻm going to buy.