Synchrony Financial (Synchrony, SYF) reported solid 3Q18 results, which were also ahead of consensus expectations. However, we note that these results are somewhat distorted by the acquisition of the PayPal credit programme in July 2018 (making Synchrony the exclusive issuer of PayPal Credit in the US). This has diluted earnings 2018 YTD as the company built up reserves and costs to prepare for this, but the deal will be accretive to earnings in 2019. Nevertheless, Synchrony came out with a quarterly earnings print of $0.91/share (+30% YoY; 3Q17 $0.70), beating a Zacks consensus estimate of $0.80/share. Revenue rose by 8.9% YoY to $4.21bn (3Q17 $3.88bn) for the quarter, surpassing the Zacks consensus estimate by 0.50%.
Purchase volumes were good (up 11% YoY) and the loan book (i.e. outstanding loans from retail credit card customers) was up 14% YoY to $8bn at period end. Importantly, we note that the loan book is showing that credit metrics are solid and have even strengthened somewhat. In recent quarters the firm has been issuing more credit to higher FICO score customers (i.e. credit ratings over 720) and reducing exposure to sub-prime customers (i.e. credit ratings under 660). We also highlight that Synchrony will be losing the Walmart card contract in 2019, although we expect it to make up for this loss by buying back shares and other initiatives.
This is a very well-run business in our view, which provides credit to middle and lower-income US shoppers. Synchrony has been in business since the 1930s and was spun out of General Electric in 2014. The firm has a c. 40% share of the private-label retail credit card market. The retail card sector is currently out of favour and retail card companies have typically traded at a higher rating of say 9.8x forward earnings over the past five years, while the current rating is < 9x. Investors are concerned about a potential slowdown and a negative turn in the job and credit metrics. However, for now, higher interest rates benefit the card companies – until the write-offs eventually begin to increase. The Synchrony management team therefore has to carefully balance risk and return in this arguably more cyclical end of the credit market. We are backing them to do that.
The business generated a ROE of 18.7% for 9M18. The book value is $19.47 (P/B on latest book value is 1.58x). We believe that this has scope to increase further as Synchrony shows its ability to manage credit well through the cycle. Berkshire Hathaway is a large shareholder in the business.
Synchrony paid a quarterly common stock dividend of $0.21/share and repurchased $966mn of its common stock in the quarter under review.
The share price rose 5.8% on Friday (19 October) following the results, to close at $31.36/share.
