Although Synchrony Financial (NYSE:SYF) isn't a familiar name to most Americans, it has a presence in many of their lives regardless. That's because this recent spinoff of General Electric's once-powerful GE Capital is the No. 1 manager of store-brand credit cards. If you've got a branded card from Gap, J.C. Penney, or Wal-Mart, to name several of many, you're a Synchrony Financial customer.
So Synchrony Financial has a wide reach, and a huge customer base. Let's see if that, plus the company's performance, makes it a worthwhile investment.
Buy now, pay later
In contrast to its peers in the traditional banking segment, Synchrony Financial rules its private-label store card management niche, with a huge market share estimated at 43%.
The company's key financial and performance metrics are headed in the right direction. Total loans outstanding, net interest income, total purchase volume, and net profit were all up by high single-digit percentages in fiscal 2015. Meanwhile, the company's operations are lean and mean; last year, its efficiency ratio (the proportion of operating costs to net revenue) came in at 34% -- in the financial sector, a figure under 50% is considered excellent.
For comparison, Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM), two giants with big credit card operations, recently posted percentages of 55% and 63%. Synchrony Financial also matches up favorably against purer-play credit card companies American Express (NYSE:AXP), at 58%, and Discover Financial Services (NYSE: DFS), with 39%.
For obvious reasons, Synchrony Financial is dependent on the consumer cycle. All things being equal, if retail spending is up, it'll make more money. That works in the company's favor just now, as the economy is motoring along and shoppers continue to spend happily. One estimate from Nomura has it that Synchrony Financial's loan portfolio will grow by 8% in 2016 on the back of these positive factors.
Not every figure is in the plus column for Synchrony Financial, however. It's got a riskier pool of loans, as standards are less stringent for store credit cards. Although the company has managed to lift the overall creditworthiness of its clientele over time, more than a quarter of its cardholders have FICO scores below 660 -- putting them into the subprime category as per the standard of many lenders.
The higher the risk, the more frequent the defaults. Synchrony Financial's net charge-off rate was 4.2% in 2015, well above the average of the top 100 U.S. banks' credit card operations, which was 2.9% in Q4 of that year. Recent quarterly figures from the much more discerning AmEx and Discover came in at 1.4% and 2.3%, respectively. Citigroup's was higher at 3.8%, but it still beat that of Synchrony Financial.
Additionally, Synchrony Financial hasn't been quick to embrace cutting-edge purchasing products from retailers. For example, Starbucks runs its own, increasingly sophisticated, Starbucks Rewards loyalty program, accessible via mobile app.
Although the program doesn't involve credit, it does allow coffee quaffers to order their goods in advance through the system, rack up points for free products, and load their accounts with money drawn from payment cards.
Marrying its traditional credit lending activities with programs like this would make Synchrony, with its existing market dominance, an impossible-to-ignore, go-to provider of such solutions. Most retailers hook up with companies like this precisely because they don't want to run such operations on their own. This is a potentially very high-growth segment that the company seems to be missing out on.
Stock on sale
On a price-to-earnings basis using anticipated current-year earnings, Synchrony Financial doesn't stand out as a huge bargain. Compared to the monster incumbents with big card operations, it's slightly cheaper than JPMorgan Chase (P/E of 10.3 vs. 10.5), but pricier than Citigroup (8.3). Going the purer-play card route, it edges out AmEx's 10.9, but loses against Discover's 8.8.
But Synchrony Financial's anticipated to grow at a high single-digit percentage rate next year. It should be able to keep that momentum going as long as Americans continue to spend confidently, so ultimately it represents a good deal at the current price -- although I'd have more confidence in the company if it made a notable shift away from traditional swipe-and-buy plastic into complex digital solutions like Starbucks Rewards.
Yet the company still has room for growth, and could be a good addition to a portfolio for those with some appetite for a somewhat under-the-radar, unique financial stock.