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Synchrony Financial Are Private Label Credit Cards a Value?

There is one major US credit card provider that you might not be familiar with, it is Synchrony Financial (NYSE: SYF) the company formerly known as GE Capital. Synchrony, America’s larger of private label credit cards; was spun off from GE Capital in 2014.

Synchrony can be considered a value investment because of its low stock price $28.08 on April 7, 2016, and high profit margin 21.36% for the fourth quarter of 2015. It also had a very high return on equity 19.13% on December 31, 2015, and considerable revenue growth.

The company also has a very simple value which could theoretically generate a lot of float. It issues private-label credit cards, the branded plastic that can only be used at specific retailer. In addition to that Synchrony also issues some retailers MasterCard or Visa brand credit cards and number of other financial products.

This business model did generate $2.214 billion in revenue, $1.889 billion in free cash flow, $5.116 billion in cash from financing and $6.184 billion in cash from operations during the fourth quarter of 2015. That gives Synchrony a lot of float it reported having $12.32 billion cash and short and term investments during the fourth quarter.

Value investors will also be interested to know that Synchrony is undervalued it had a market capitalization, of $23.39 billion and an enterprise value of $35.91 billion on April 7, 2016. So it does meet two classic value criteria, it is cheap and it generates a lot of float but is Synchrony capable of growth?


Is Synchrony Capable of Growth

After all store-issued credit cards are in decline with more and more retailers abandoning their own cards. Some of Synchrony’s customers are pretty questionable too. Its credit brands include such retail basket cases as JC Penney (NYSE: JCP), which is hardly the cutting edge of the industry.

Even bigger threats loom on the horizon; such as the growth of Citigroup (NYSE: C) which just landed Costco Wholesale’s credit card contract, and various digital wallets. App-based digital wallets such as Apple Pay and Android Pay are still a tiny but growing portion of the market.

Digital Wallet purchases only made up around .2% of the $4.35 trillion American shoppers spent at stores in 2015, The New York Times Deal Book reported. Yet that number could soon as big banks such as JPMorgan Chase (NYSE: JPM) enter the digital wallet arena.

Synchrony is Doing Better than Amex 

Despite that Synchrony is capable of significant revenue growth. The company reported revenues of $7.988 billion in September 2014 that grew to $9.84 billion in December 2014, $10.29 billion in December 2015 and $10.41 billion in December 2015. Synchrony’s business is still expanding despite all the changes in the credit card industry, which is better than you can say for American Express (NYSE: AXP).

Amex’s revenue fell from $34.91 billion in December 2014 to $32.82 billion in December 2015. The major cause of the loss was American Express’s loss of the Costco Wholesale (NASDAQ: COST) exclusive credit-card deal in Canada. The company will lose a similar deal with America’s favorite club store this year.


Synchrony’s ability to survive, grow its business and generate a lot of float makes it a credible value and growth investment. There are some risks here, but they are pretty limited. More importantly Synchrony has some interesting opportunities in front of it.

The growing popularity of payment apps such as Apple Pay and Android Pay could increase the demand for credit cards and lines of credit. Synchrony could also jump into that arena perhaps by developing branded digital wallets or payment apps for stores that are linked to a credit card. A JC Penney button on your phone for example.

Other opportunities include growing retailers such as Aldi, Dollar General (NYSE: DG) and Kroger (NYSE: KR) which will offer more opportunities to create more branded cards and open sourced lending. A potential area of growth for companies like Synchrony is to develop platforms similar to that of Lending Club (NYSE: LC) which allow private individuals to invest in consumer credit.

If you are looking to add a low-cost credit card related stock to your portfolio, Synchrony is well worth a look. It is cheap, it appears to be undervalued, it has a lot of float, and some growth opportunities. This is definitely a value stock I would give a buy rating to.