This Consumer Credit Company Is on Sale

We like the value proposition Synchrony Financial brings to cardholders and its retail partners.

The former General Electric Consumer Capital became a public company in 2014 and fully separated from GE in late 2015.

The company operates primarily in the private-label credit card space with nationally known retailers such as Walmart, Lowe's, and Gap, offering quick, point-of-sale credit decisions to consumers. Synchrony has stepped in offering its credit products during a time when banks have been more cautious offering unsecured credit cards in the post-financial crisis era.

With its retail partners, Synchrony can offer the elimination of interchange fees through its closed-loop network as well as share purchase information and data on individual cardholders. Plus, depending upon the success of the program, Synchrony shares the profits of the program with the retailer. For cardholders, the cards offered by Synchrony can offer competitive rewards with the general purpose card space, such as cash back or store discounts.

While many investors are concerned with the riskiness of unsecured consumer credit, we at Morningstar have found that net charge-off rates are highly correlated to the national unemployment rate. The lower unemployment is, the lower the credit costs to Synchrony.

With no branches necessary to support its growing deposit base, Synchrony is highly efficient relative to the brick-and-mortar bank branch model.

At approximately 30% discount to our fair value estimate, not only do we think Synchrony can be a value proposition to retailers and cardholders but to shareholders as well.