Synchrony Financial Rides On Acquisitions, High Costs A Woe

Synchrony Financial (NYSE:SYF) offers a wide range of credit products through a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and health and wellness providers. The company’s solid organic and inorganic strategies backed by strong financial position have paved the way for its long-term growth.

Synchrony Financial’s’s top line has witnessed a three-year (2013–16) compound annual growth rate (CAGR) of 9.5%. This consistent revenue growth primarily has been driven by its rapidly growing interest income as well as inorganic growth strategies. Synchrony Financial’s revenues are primarily generated from the credit products, which make its growth dependent on the ability to retain existing partners and attract new partners.

The company has been witnessing substantial inorganic growth since 2013, the year of its inception. Its CareCredit unit acquired the Citi Health Card portfolio to further expand its healthcare acceptance network in the United States. A major mention here is the buyout of GPShopper that created new mobile solutions for Synchrony Financial’s retail partners.

CareCredit has been significantly contributing to the company’s growth. Being a leading provider of promotional financing to consumers for health and personal care procedures, products or services, this unit has seen steep increase in interest and fees on loans which aided to the company’s overall top-line growth.

Synchrony Financial’scontinuous investment in technology in order to upgrade its offerings has helped it establish a strong position in the market. Even during the first quarter of 2017, Synchrony Financial launched Cathay Pacific program and Synchrony Car CareTM credit card to increase customer engagement in its offerings.

Its consistent cash flow generation supports capital deployment activities. Net cash from operating activities that has witnessed a three-year (2013–16) CAGR of 6.3% helped it deploy capital through share buybacks and dividend payments to enhance shareholders’ value.

The stock also seems undervalued compared to its peers. Its P/E ratio is 11.37, which although is above the midpoint of its range (11.37-14.01), compares favorably with the broader industry average of 16.47.

Despite these tailwinds, the stock has lost nearly 18% year to date, whereas the Zacks categorized Financial- Miscellaneous Services industry gained 4.6%. This underperformance has likely stemmed from higher expenses. The company has been witnessing a steep rise in its expenses since 2013, the year of its inception. Total other expenses have witnessed a three-year CAGR (2013–16) of 12.3%. In addition, increasing allowance for loan losses as well as rising fraud related loss also might have caused this underperformance

Zacks Rank and Stocks to Consider

Synchrony Financial currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance sector include The Progressive Corp. (NYSE:PGR) , Cigna Corporation (NYSE:CI) and FBL Financial Group, Inc. (NYSE:FFG) . Progressive sports a Zacks Rank #1 (Strong Buy) where as the other two stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Progressive has delivered positive surprises in two of the last four quarters with an average beat of 4.95%.

Cigna has delivered positive surprises in three of the last four quarters with an average beat of 1.35%.

FBL Financial has delivered positive surprises in two of the last four quarters with an average beat of 1.98%.

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