Synchrony Financial: Market Sentiment Improves as Growth and Credit Quality Stabilize
Synchrony Financial (SYF) has experienced a remarkable turnaround in market sentiment, with its stock price soaring nearly 65% since October 2023. This impressive performance has continued despite a recent downgrade to a regular ‘Buy’ rating, with the stock still delivering an 18.6% return in the past quarter.
Underlying this positive sentiment is Synchrony’s consistent growth in loan receivables across all five of its market segments. Notably, the Health & Wellness segment has witnessed a surge of 20%. While some caution is warranted due to a slight slowdown in purchase volume, especially among lower-income consumers, the company’s overall growth trajectory remains strong.
Synchrony’s credit quality, a key concern in recent years, is also showing signs of improvement. Delinquencies have leveled off, and the company projects charge-offs to peak in mid-2024. This optimism is supported by the recent decline in late fees, as well as Synchrony’s prudent provisioning.
Beyond its core business, Synchrony has made strategic moves to enhance its position. The sale of its Pets Best pet insurance business generated a substantial after-tax gain of $800 million. The proceeds, combined with the acquisition of Ally Financial’s point-of-sale lending portfolio, have strengthened Synchrony’s balance sheet and positioned it for further growth.
Despite the positive developments, Synchrony is not immune to potential headwinds. Regulatory changes that cap late fees could impact revenue, and a prolonged economic downturn may affect loan performance. However, the company’s strong liquidity and well-capitalized position mitigate these risks.
In terms of valuation, Synchrony remains attractive. Excluding the gain from the Pets Best sale, the company’s non-GAAP P/E stands at 7.5, and its end-of-year P/B is projected to be 1.14. While Synchrony trades at a premium to some peers on a P/B basis, its lower P/E ratio makes it relatively undervalued.
Overall, Synchrony Financial’s improved growth prospects and stabilizing credit quality have bolstered market sentiment. The company’s attractive valuation, combined with its strategic initiatives, position it well to capitalize on opportunities in the consumer credit market.
