Is Synchrony Financial Trading at an Attractive Price?

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Synchrony Financial (NYSE: SYF) has roots that date back to 1932.

The company was founded by GE Capital Retail Bank during the Great Depression to provide cash-strapped customers a line of credit to purchase GE appliances.

For the following eight decades, Synchrony operated under the GE corporate umbrella.

Then, in 2014, GE spun off the Synchrony business as a stand-alone company.

Like many people, my wife has never heard of Synchrony Financial. Yet she has been a loyal customer for years and years.

That is because Synchrony Financial controls nearly one-half of the private-label credit card market.

A few years ago, my wife signed up for an Amazon credit card.

With it, my family receives 5% back on Amazon purchases plus some other interesting perks.

We have been able to save hundreds of dollars just from our regular purchases.

That Amazon credit card was issued by Synchrony Financial. Thus, we have been banking with Synchrony for half a decade.

Amazon is just one of Synchrony’s partners.

The top five companies that Synchrony handles cards for are Amazon, PayPal, Lowe’s, Sam’s Club and J.C. Penney.

These are powerful relationships for Synchrony.

Synchrony’s partners are incentivized to promote Synchrony’s products, as getting a customer to sign up for a store-issued card strengthens loyalty and increases sales.

I know it to be true personally.

The average length of the working relationships that Synchrony has with its partners is currently 20 years.

So these are terrific long-term, sticky relationships.

With corporate heavyweights as partners, Synchrony Financial itself is a big business.

For 2022, Synchrony’s cards were used make $180 billion worth of purchases.

Currently, Synchrony has 70.8 million active credit cards with outstanding balances totaling $92.5 billion.

Synchrony makes money by earning interest on those credit card balances as well as by charging fees to cardholders.

Additionally, similar to other credit card companies, Synchrony charges a transaction fee to the retailer at the time of each transaction.

There is no question that this business will be cyclical and will ebb and flow with the economy.

But Synchrony has proved itself to be durable – holding up very well through both the financial crisis and the pandemic.

In every year that Synchrony has operated as a public company, it has been profitable.

To fund credit card loans, Synchrony offers deposit products that are insured by the Federal Deposit Insurance Corporation.

These deposits are a source of low-cost funding for Synchrony.

The company has had major success in growing its deposit base and in lowering its funding cost.

In 2015, Synchrony’s deposits were less than $28 billion.

Today, the company has total deposit funding of more than twice that at $66 billion.

Synchrony’s charge-off rates are slightly higher than those of bank issuers of credit cards. That’s because Synchrony targets customers with lower FICO scores. But the company more than makes up for those larger charge-off rates with higher interest rates.

This business model works, and it works well. The company just turned 90 years old!

As I write, the consensus average earnings per share estimate for Synchrony in 2024 is $5.33.

With a share price of $34, Synchrony is trading at a measly 6.3 times 2024 earnings.

Historically, Synchrony has traded at around nine times earnings.

To get back to this level, the stock would have to rise by almost 50%.

Even with Synchrony trading at nine times earnings, I think it is an attractive value.

Since going public, the company has grown earnings per share at an annualized rate of 10%.

Anytime you can pay a single-digit price-to-earnings multiple for a company that is growing at a double-digit clip, you should take it.

The Value Meter rates Synchrony Financial as “Slightly Undervalued.”

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