Synchrony Sell-Off Offers Opportunity
We believe the current share price already reflects much of what could go wrong.
Synchrony Financial (SYF) provides the store-branded credit cards of many of the country’s largest retailers, including Amazon, Walmart, Gap, and JCPenney, and benefits from these long-term mutually beneficial relationships. Since 2008, Synchrony has routinely generated returns on equity exceeding 15%, partly as a result of high switching costs. In the coming years, we believe Synchrony will be able to increase returns on equity as a result of higher leverage while returning a substantial amount of cash to shareholders. We believe it can increase balance sheet leverage without putting shareholder returns at risk.
Private-label card providers are enjoying some favorable tailwinds. Retailers have become increasingly pressured by the likes of Amazon, which has encouraged merchants to pursue additional revenue streams while necessitating the collection of shopper data to offer tailored marketing programs. Synchrony has been a valuable partner for many retailers. Despite this, we expect a moderation in performance from the supernormal returns achieved by Synchrony and other private-label credit card providers since 2008 as a result of rising competition for new receivables. Retailers have been able to negotiate increasingly favorable terms, which we expect will damp Synchrony’s margins. In addition, Synchrony can only prosper as long as its partners remain in business. In 2017, Synchrony saw partner HH Gregg file for bankruptcy. Our biggest concern is that Synchrony’s performance will improve as pain increases for retailers, which could give a skewed picture of the company’s prospects. Once retailers file for bankruptcy, it will provide a significant headwind to Synchrony’s growth.
Colin Plunkett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.