Decline in purchase volume and credit actions present risks to future earnings and profitability.
Rising costs and macroeconomic uncertainties could lead to weaker revenue outlook and margin compression.
Synchrony's diverse product suite, partnerships, data-driven strategies, and strong capital position may enhance growth, profitability, and resilience.

About Synchrony Financial

Operates as a consumer financial services company in the United States.What are the underlying business or industry changes driving this perspective?

Synchrony's purchase volume has been negatively impacted by credit actions and selective customer spending behavior, leading to a significant decline in net revenue, which could imply lower future earnings if purchase volume does not rebound.
The risk of macroeconomic uncertainty, such as potential tariffs, may further dampen consumer confidence and spending, resulting in a weaker revenue outlook and potential margin compression if costs cannot be controlled.
The company's provision for credit losses has decreased due to reserve releases, which may not be sustainable if economic conditions worsen, potentially leading to increased credit costs and reduced profitability.
Synchrony's expansion and renewal of partnerships with new and existing partners come at a potential risk of higher costs or lower pricing power, which could squeeze net margins if competitive pressures increase.
Despite investments in technology and enhancements to customer experience, rising expenses related to these initiatives could outpace revenue growth in an inflationary environment, leading to deteriorating net margins and lower future earnings.

Synchrony Financial Earnings and Revenue Growth

How have these above catalysts been quantified?

This narrative explores a more pessimistic perspective on Synchrony Financial compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
The bearish analysts are assuming Synchrony Financial's revenue will grow by 22.2% annually over the next 3 years.
The bearish analysts assume that profit margins will shrink from 33.1% today to 18.5% in 3 years time.
The bearish analysts expect earnings to remain at the same level they are now, that being $2.9 billion (with an earnings per share of $6.4). The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, down from 7.1x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.7x.
Analysts expect the number of shares outstanding to decline by 5.2% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.62%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

Synchrony's ability to consistently engage customers and drive loyalty through its diverse product suite and sophisticated underwriting could lead to increased revenues and earnings.
The renewal and addition of significant partnerships, such as those with Sun Country Airlines and American Eagle, may drive growth in purchase volume and positively impact net margins.
The company's data-driven approach in managing consumer spending and payment behaviors could lead to lower credit loss provisions, thereby benefiting net earnings.
Synchrony's strong net interest margins, supported by lower interest-bearing liabilities costs and increased loan receivable yields, may enhance profitability.
The robust capital position and strategic capital return plans, including share repurchases and dividend increases, can provide resilience and potentially improve earnings per share.

How have all the factors above been brought together to estimate a fair value?

The assumed bearish price target for Synchrony Financial is $42.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Synchrony Financial's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $88.0, and the most bearish reporting a price target of just $42.0.
In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $15.9 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 8.6%.
Given the current share price of $53.77, the bearish analyst price target of $42.0 is 28.0% lower.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

Credit Actions And Tariffs Will Squeeze Net Margins