(Synchrony Financial) (SYF)

Overview of the Company - Synchrony Financial is a consumer financial services company. They provide credit cards, financing and consumer banking products. Synchrony offers their credit products through other established businesses, should consumers choose to finance their purchases.

Fundamental Analysis - Synchrony Financial is in a good position as consumers look to head out of the house and spend more. As inflation rises, Synchrony will be able to protect their business by simply raising their rates accordingly. In addition, as inflation drives up prices, consumers will undoubtedly have to spend more which is good for credit card companies and institutions that provide financing solutions - SYF does both. Obviously, SYF does not benefit in a stagflation environment, where we have inflation, but people aren't out spending money, but if inflation is truly transitory and the economy continues to grow during this period, SYF will stand to benefit.

How (SYF) Stacks Up to Competitors - I will be comparing SYF to two other similar financial services companies, Discover Financial Services (DFS) and Ally Financial (ALLY). At first glance, all trade at about the same valuation with a 7 P/E. In addition all are relatively the same size, with DFS at a $34 billion market cap and SYF at $27 billion and Ally at $17 billion. All have great profitability margins and returns on equity, but Ally does lag a little in both categories. All three have seen really good revenue growth but SYF has seen the best earnings growth for the quarter (yoy) by far. In addition, all have sizable cash positions but also a lot of debt that out sizes their cash. SYF trades at about 2 times book, DFS at 3 times and ALLY sits just 25% over book value. It is clear that all three are very similar fundamentally and pay roughly the same dividend. However, Ally is the clear value play, but some of the numbers do suggest that management and growth is not as strong as the other companies.

Bull Case - Synchrony Financial is in a great place right now relative to our economy. They are generally protected against transitory inflation and stand to make good money from strong consumer spending. Combined with the fact that not much growth is priced into this company and it offers a solid dividend - SYF will outperform.

Bear Case - The growth in SYF has been too stagnant to warrant any type of P/E over 7x or 8x. With earnings forecasts flatlining over the next year, SYF will have to post some significant beats to be able to compete with the market. Even if they beat earnings estimates by 16% for the next year and trade at 7x earnings which is industry standard - you get a price target of $49. Pretty much exactly where the stock is trading at today. SYF will underperform the market.

Valuation and My Price Target - I think SYF is in a good position for growth and I think that it will be able to sustain a slight upgrade from the industry norm and trade at a P/E of 7.5x. I do believe that SYF will be able to beat consensus EPS forecasts and achieve a EPS of $7.15 next year. This gives us a price target of $53.50 or about 8% upside.

The Verdict - BUY HOLD SELL

Given the price target of $53.50, which only indicates about 8% growth from here I think SYF just isn't attractive enough. Certainly SYF will be an underperformer, but given the almost 2% yield, Synchrony may have a place in your portfolio to maintain stability. However, as you can see from the chart, SYF has been stuck in a range form $46 - $52 since June 2021 (note the very strong bounces off the $46 level). It will take some real good news for this stock to break out. I would lean toward Discovery Financial Services (DFS) if I had to choose from the 3 companies. As for Synchrony Financial, it is currently a HOLD.

*all data provided by yahoo finance and nasdaq.com