Decisive Partnerships And Digital Expansion Set To Boost Customer Engagement And Revenue

Key Takeaways

• Expansion in digital capabilities and strategic partnerships highlight potential for increased customer engagement and higher transaction volumes.
  
• Proactive management of credit portfolio risks and new partnerships aim to maintain healthy credit quality and attract new account growth, supporting revenue diversification.
  
• Synchrony Financial faces challenges in balancing risk, managing operational costs, and adapting to regulatory changes, potentially impacting profitability and revenue growth.

Catalysts

Operates as a consumer financial services company in the United States.

• Synchrony's expansion of digital capabilities and strategic technology partnerships, such as those for enhancing point-of-sale experiences, point towards an increase in customer engagement and transaction volumes, potentially boosting revenues.
  
• The continued growth in active accounts and transaction frequency despite a decrease in average transaction values suggests a solid customer base and diversified revenue sources, which could positively impact net margins through volume growth even if per-transaction revenue dips.
  
• Actions taken to address credit portfolio risks, including proactive management of higher-risk accounts, signal a focus on maintaining a healthy credit quality, which may lead to lower provision expenses and improved net charge-off rates, positively affecting net income.
  
• New partnerships and renewals, like the program expansion with Verizon and the launch of the Virgin Red Rewards World Elite MasterCard, are expected to attract new account growth and increase purchase volumes, contributing to revenue growth and diversification.
  
• Synchrony Financial's disciplined approach to return on equity, combined with capital management strategies such as share repurchases, aims to optimize shareholder returns, indicating an underpinning for potential earnings per share growth.

Assumptions

• Analysts are assuming Synchrony Financial's revenue will grow by 22.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.6% today to 13.7% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $6.84) by about August 2027, down from $3.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2027 earnings, up from 6.1x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 5.49% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.96%, as per the Simply Wall St company report.

Risks

• The company's targeted risk-adjusted returns over the long term may be challenged by persistent higher net charge-off rates and increased reserves, indicating potential pressure on net margins.
  
• Ongoing and necessary credit actions to manage portfolio risk could dampen new account and purchase volume growth, potentially slowing revenue growth.
  
• Investments in technology and strategic partnerships, while strengthening competitive positioning, may escalate operational costs, impacting net income if revenue growth does not keep pace.
  
• The implementation of the Late Fee rule and Pricing, Product, and Policy Changes (PPPCs) introduces uncertainty around consumer behavior, which could affect the volume of transactions and overall customer engagement, potentially dampening revenue and earnings.
  
• The reliance on diversified funding sources and management of a higher reserve coverage ratio may restrict financial flexibility or result in higher funding costs, impacting profitability.

Valuation

• The analysts have a consensus price target of $55.03 for Synchrony Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $16.2 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $45.76, the analyst's price target of $55.03 is 16.9% higher.
  
• 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.