Synchrony (SYF) Down 4% Since Last Earnings Report: Can It Recover?

It’s been about a month since Synchrony’s (SYF) last earnings report. Shares have lost about 4% in that time, underperforming the S&P 500.

Will the recent negative trend continue until the next earnings release, or is Synchrony due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the company’s most recent earnings report in order to better understand the important catalysts.

Synchrony’s lack of profits in the first quarter due to low margins and higher costs

Synchrony Financial reported first-quarter 2024 adjusted earnings per share (EPS) of $1.18, representing a difference of 13.9% from the Zacks Consensus Estimate. The financial result decreased by 12.6% year on year.

Net interest income increased 8.9% year over year to $4.4 billion, but missed the consensus estimate by 0.9%.

Quarterly results were impacted by lower net interest margins, new accounts and higher rates and net fee reduction costs. Nevertheless, SYF’s results received a boost from strong purchase volumes resulting from solid contributions from four of its five sales platforms. The growing portfolio of loan receivables also contributed to the growth.

Detailed results for the first quarter

Synchrony’s other revenue was $1.2 billion, growing by a huge margin year-over-year in the first quarter, largely driven by gains on sales of Pets Best. This metric also increased on the back of better revenue growth from replacement services and protective products, up 3.9% and 22.6%, respectively.

SYF’s total credit receivables increased 11.6% year-over-year to $101.7 billion and exceeded our estimate of $100.2 billion for the quarter.

Total deposits were $83.6 billion, up 12.3% year-over-year. The provision for credit losses increased 46% year-over-year to $1.9 billion due to increased net charge-offs.

Synchrony’s purchase volume increased 2% year-over-year to $42.4 million in the first quarter. However, this result was worse than our estimates by 4.3%.

Interest and fees on $5.3 million in loans increased 15% year-over-year as a result of a growing average loan receivable portfolio, higher benchmark rates and lower payment rates. However, it differed slightly from our estimates. Net interest margin decreased 67 basis points (bps) year-over-year to 14.55%.

New accounts of 4.8 million were down 8% year over year. Average active accounts increased 3% year-over-year to 71.7 million in the first quarter.

SYF’s total remaining expenses were $1.2 billion, up 7.8% year-over-year and exceeding our estimate by 3.8%. The efficiency ratio of 25.1% deteriorated by 990 basis points year over year in the quarter.

The story continues

Update of individual sales platforms

House and car End-of-period loan receivables increased 10% year-over-year to $32.6 billion on lower payment rates. However, purchase volume of $10.5 billion declined 3.2% year-over-year in the first quarter. Loan interest and fees increased 12.8% year-over-year to $1.4 billion, slightly off our estimate, due to an increase in loan receivables and an increase in benchmark rates.

Digital End-of-period loan receivables of $27.7 billion increased 11.2% year-over-year in the quarter on lower payment rates and higher purchase volumes. Purchase volume was $12.6 billion, up 3% year-over-year, driven by increasing average active accounts and improved customer engagement. Loan interest and fees increased 15% year-over-year to $1.6 billion, a 3.2% difference from our estimate, driven by growth in loan receivables, higher benchmark rates, newer programs maturing and lower payment rates.

Diverse and valuable End-of-period loan receivables increased 11.2% year-over-year to $19.6 billion in the first quarter, driven by higher purchase volumes and lower payment rates. Purchase volume of $14 billion increased 4.3% year-over-year, attributable to solid affiliate and affiliate spending. Loan interest and fees increased 13.5% year-over-year to $1.2 billion, topping our estimate by 2.2% based on higher loan receivables and benchmark rates.

Health and beauty End-of-period credit receivables of $15.1 billion increased 19.7% year-over-year in the quarter due to increased promotional purchase volume and reduced payment rates. Purchase volume increased 7.9% year-over-year to $4 billion, driven by strong growth in active customers, primarily in the Dental, Pet and Cosmetic industries. Loan interest and fees increased 18.2% year-over-year to $869 million, which exceeded our estimate of $825 million due to growth in volume and loan receivables.

Lifestyle End-of-period loan receivables increased 10.6% year-over-year to $6.6 billion in the first quarter, driven by increasing purchase volumes and reduced payment rates. Purchase volume of $1.2 billion declined 4.5% year-over-year due to lower transaction value. Loan interest and fees increased 14% year over year to USD 255 million, which is 12.8% higher than our estimate.

Financial situation (as of March 31, 2024)

Synchrony ended the first quarter with $20 billion in cash and cash equivalents, up from $14.3 billion at the end of 2023.

Total assets increased to $121.2 billion in the first quarter from $117.5 billion at the end of 2023. Total debt rose to $16.1 billion from $16 billion at the end of 2023.

Total equity of $15.3 billion increased from $13.9 billion at end-2023.

SYF’s balance sheet remained strong during the quarter, with total liquidity of $24.9 billion representing 20.5% of the company’s total assets.

In the first quarter, return on assets of 4.4% increased by 210 basis points year over year, and return on equity improved by 1,740 basis points year over year to 35.6% over the same period.

Capital deployment

Synchrony returned $300 million of capital through share repurchases and paid common share dividends of $102 million in the first quarter of 2024. The company’s board approved a new share repurchase plan to purchase $1 billion of shares by June 30, 2025 .It had a remaining share redemption capacity of $1.3 billion.

Guidelines 2024

The company previously expected loan receivables to grow at around 6-8% in 2024. In 2023, loan receivables recorded an 11% year-on-year increase. The company anticipates that the moderate pace of payments will continue but remain above pre-pandemic levels.

Net interest income was expected to be around $17.5 billion to $18.5 billion, an improvement over the prior year of $17 billion.

Net write-offs were expected to be around 5.75-6%, an increase from the 2023 reported figure of 4.87%. The company expects net write-offs to peak in the first half and then reach pre-pandemic levels through the remainder of 2024.

Management expects RSA/average loan receivables to range from 3.5% to 3.75% in 2024, reflecting normalized lending, high interest costs and portfolio structure offset by increased purchase volumes.

The Management Board expects an efficiency ratio in the range of 32.5-33.5% in 2024.

How have estimates changed since then?

It turns out that estimate revisions have been trending upwards over the past month.

As a result of these changes, the consensus estimate moved by 9.25%.

VGM results

Currently, Synchrony has a nice B growth score, a rating with the same momentum score. Plotting a somewhat similar path, the stock is rated an A on the value side, putting it in the top quintile for this investment strategy.

Overall, the company’s Total VGM Score is A. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company generally show an upward trend, and the scale of these corrections looks promising. Notably, Synchrony carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

Industry player performance

Synchrony is part of the Zacks Financial – Miscellaneous Services industry. Over the past month, Globe Life (GL), a stock in the same industry, has gained 6.6%. More than a month ago, the company published its results for the quarter ended March 2024.

In the most recent quarter, Globe Life reported revenues of $1.4 billion, representing a year-over-year change of +3.9%. EPS of $2.78 in the same period compared to $2.53 a year ago.

For the current quarter, Globe Life is expected to report earnings per share of $2.89, which would represent a year-over-year change of +10.7%. Over the past 30 days, the Zacks Consensus Estimate has moved +0.1%.

The overall direction and magnitude of estimate revisions translates into a Zacks Rank #3 (Hold) for Globe Life. The stock also has a VGM Rating of A.

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