Today’s news: Synchrony Financial (SYF) reports big fourth-quarter earnings beat and moves from Hold to Strong Buy.
As I mentioned in yesterday’s Weekly Update, I am generally waiting for the stock market’s first pullback, during this recovery from the fourth-quarter 2018 stock market correction, before moving many good stocks from Hold to Buy recommendations. However, today’s news on Synchrony Financial (SYF – yield 2.9%) is so good that the odds of a significant pullback have all but disappeared.
Synchrony reported fourth-quarter earnings per share (EPS) of $1.09 this morning, gapping above all analysts’ estimates.
Several major investor fears have been eliminated:
The market was worried about credit risk, i.e. consumers being unable to repay credit cards and loans. However, as fourth-quarter results began trickling in from banks, it became clear in recent days that net charge-offs (NCOs) are remaining low and stable at most financial institutions. Synchrony’s fourth-quarter NCOs came in lower vs. a year ago.
The market was worried about Synchrony’s spat with Wal-Mart (WMT) over the value and disposition of the Wal-Mart credit card portfolio in light of their curtailed business partnership. Today, Synchrony announced that they’ve come to an agreement with Capital One (COF) over the disposition of the credit card portfolio, and that Wal-Mart has dropped their related lawsuit against Synchrony. Capital One will acquire approximately $9 billion of credit card receivables from Synchrony in the second half of 2019.
The market was worried that Synchrony’s partnership with Sam’s Club was in jeopardy, in light of the dissolution of the Synchrony-Wal-Mart relationship. Today, Synchrony announced a contract renewal with Sam’s Club, wherein Synchrony will continue to manage and service the credit card program for Sam’s Club members across the retailer’s nearly 600 clubs.
Synchrony Financial is a consumer finance company with 80.3 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans.
Prior to this morning, Wall Street expected EPS of $4.38 in 2019 (December year end), reflecting 22.3% growth. The 2019 P/E was extremely low at 6.0. Investors can now expect earnings revisions in the coming days. The significant disparity between the strong earnings growth and the low P/E, in combination with the attractive dividend yield, will continue attracting investors to the stock.
As of 7:30 a.m. ET, the stock is up 10% in pre-market trading.
I expect a few days of volatility, with investors piling into the stock and traders rapidly buying and selling. Unless you’re a day trader, I would not fret over your acquisition price of the stock, because I expect it to perform well from here on in, barring any serious stock market disruption. Investors who buy at 29 have 34% upside if SYF retraces its 2018 high of 39.
I’m moving SYF from Hold to Strong Buy, now that it’s clear that major worries have been alleviated concerning the dissolution of the Wal-Mart relationship and potential weakening of credit quality. Strong Buy.