Financial Services Stocks

Synchrony Financial Valuation – March 2019 #SYF

Company Profile (excerpt from Reuters): Synchrony Financial (Synchrony), incorporated on September 12, 2003, is a consumer financial services company. The Company provides a range of credit products through programs it has established with a group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers. The Company’s revenue activities are managed through three sales platforms: Retail Card, Payment Solutions and CareCredit. It offers its credit products through its subsidiary, Synchrony Bank (the Bank). Through the Bank, it offers a range of deposit products insured by the Federal Deposit Insurance Corporation (FDIC), including certificates of deposit, individual retirement accounts (IRAs), money market accounts and savings accounts.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of SYF – March 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $23,645,504,194 Pass
2. Earnings Stability Positive EPS for 10 years prior Fail
3. Dividend Record Dividend Payments for 10 years prior Fail
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 347.91% Pass
5. Moderate PEmg Ratio PEmg < 20 9.91 Pass
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.64 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.36
MG Growth Estimate 7.74%
MG Value $80.62
Opinion Undervalued
MG Grade A-
MG Value based on 3% Growth $48.76
MG Value based on 0% Growth $28.58
Market Implied Growth Rate 0.70%
Current Price $33.31
% of Intrinsic Value 41.32%

Synchrony Financial is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.22 in 2015 to an estimated $3.36 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.7% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Synchrony Financial revealed the company was trading below its Graham Number of $43.03. The company pays a dividend of $0.72 per share, for a yield of 2.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 9.91, which was below the industry average of 21.22, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Synchrony Financial fares extremely well in the ModernGraham grading system, scoring an A-.

Stage 3: Information for Further Research

Graham Number $43.03
PEmg 9.91
PB Ratio 1.64
Dividend Yield 2.16%
TTM Dividend $0.72
Number of Consecutive Years of Dividend Growth 3

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Long-Term Debt & Capital Lease Obligation $23,996,000,000
Total Assets $106,792,000,000
Intangible Assets $2,161,000,000
Total Liabilities $92,114,000,000
Shares Outstanding (Diluted Average) 720,500,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $4.03
Dec2018 $3.74
Dec2017 $2.42
Dec2016 $2.71
Dec2015 $2.65
Dec2014 $2.78
Dec2013 $2.21
Dec2012 $0.00
Dec2011 $2.28

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.36
Dec2018 $2.97
Dec2017 $2.58
Dec2016 $2.46
Dec2015 $2.22
Dec2014 $1.82
Dec2013 $1.19
Dec2012 $0.61
Dec2011 $0.76

Recommended Reading:

Other ModernGraham posts about the company

10 Undervalued Stocks for the Enterprising Investor – January 2019
Most Undervalued Stocks of the S&P 500 – August 2018
10 Undervalued Stocks for the Enterprising Investor – August 2018
10 Undervalued Stocks for the Enterprising Investor – July 2018
Synchrony Financial Valuation – June 2018 $SYF

Other ModernGraham posts about related companies

CBRE Group Inc Valuation – March 2019 #CBRE
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S&P Global Inc Valuation – March 2019 #SPGI
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Affiliated Managers Group Inc Valuation – February 2019 $AMG
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Raymond James Financial Valuation – February 2019 $RJF

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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