It has been a busy couple of months for Synchrony Financial (NYSE:SYF), the consumer finance company that specializes in private-label credit cards.
The company has been busy on the acquisition front while also selling off some of its assets. In addition, Synchrony posted strong fourth-quarter earnings on Tuesday that were better than analysts anticipated. The company’s stock price finished 2023 up 20% and is down by about 2% so far in 2024.
Let’s take a look at some of Synchrony’s moves and results to see if its stock is worth considering.
Movers and shakers
The biggest move Synchrony made recently was to acquire the Ally Lending business from Ally Financial (NYSE:ALLY). Ally Lending is a point-of-sale financing business that caters to the home improvement and healthcare industries. The business comes with $2.2 billion in loans and relationships with some 2,500 merchants and 450,000 borrowers.
Synchrony management sees this as a good fit, as it allows them to expand the company’s offerings for revolving credit and installment loans to merchants at the point of sale. In particular, Ally Lending focuses on merchants in the home-improvement area, particularly for high-growth, big-ticket items like HVAC systems, windows and roofing. It also complements Synchrony’s existing health-and-wellness platform, extending its reach into dentistry, audiology and cosmetics.
“I think this wasn’t a scale business for Ally, but on our side, this is absolutely a scale business,” President and CEO Brian Doubles said on the earnings call. “This is exactly the type of acquisition that we look for. These are businesses and industries that we know really well. We obviously have a presence already in home improvement and health and wellness … So, as I think about Ally, it really just complements and accelerates our current strategy.”
The deal is expected to close in the first quarter, and Synchrony management projects that it will be accretive to the company’s full-year earnings in 2024.
The other move came in November, when it was revealed that Synchrony sold its pet-insurance business, Pets Best, to Poodle Holdings for $750 million. The deal also gave it an equity stake in Poodle Holdings through its affiliate, Independent Pet Holdings. Synchrony bought Pets Best in 2019.
On the earnings call, Doubles said the company wasn’t looking to sell, but the offer was too good to turn down, at over 10 times the original investment.
“I think more importantly than that, it allows us to stay invested in the pet space and do it with someone, a great partner like IPH that has the scale, that has the expertise,” he explained. “And so, we think there’s not only a nice financial gain, but a long-term strategic play here that will benefit us.”
This deal is also set to close in the first quarter and will add 80 basis points to Synchrony’s common equity tier 1 (CET1) ratio.
Earnings beat estimates, but charge-offs rise
These two deals were not reflected in the fourth-quarter earnings report, but nonetheless, Synchrony had a sold quarter with revenue up 9% year over year to $4.5 billion, which easily topped estimates of 3.5 billion, while net earnings fell 24% to $440 million on higher expenses and provisions for credit losses.
The $1.8 billion in provisions for credit losses was due to a significant rise in the net charge-off ratio, which jumped to 5.58% from 3.48% in the fourth quarter of 2022. The 30-day delinquency rate also jumped, climbing to 4.74% from 3.65% a year ago.
While Synchrony’s earnings per share fell 18% year over year to $1.03, it beat earnings estimates of 94 cents per share.
For 2024, Synchrony expects loan growth of 6% to 8% over 2023 and net interest income of between $17.5 billion and $18.5 billion, which would be up from $17 billion in 2023. However, the net charge-off ratio will continue to climb and is projected to be in the 5.75%-to-6% range. Management expects the biggest jump in the first half before things start to level off in the second half of the year.
Both moves make a lot of sense for Synchrony and should help the company in the long term. However, as a consumer-finance firm, it could see some short-term headwinds in a sluggish economic environment, as evidenced by the projected increase in charge-offs. The good news is that Synchrony stock is dirt cheap, with a price-to-earnings ratio of around 7, so it is worth keeping on your radar.
