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

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

Will the recent negative trend continue leading up to its 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 its most recent earnings report in order to get a better handle on the important catalysts.

Synchrony Q1 Earnings Miss on Low Margin and Higher Costs

Synchrony Financial reported first-quarter 2024 adjusted earnings per share (EPS) of $1.18, which missed the Zacks Consensus Estimate by 13.9%. The bottom line declined 12.6% year over year.

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Net interest income improved 8.9% year over year to $4.4 billion, however, missing the consensus mark by 0.9%.

The quarterly results suffered from lower net interest margins, new accounts and higher net-charge off rates and expenses. Nevertheless, SYF’s performance received an impetus from robust purchase volume stemming from the solid contributions from four of its five sales platforms. An expanding loan receivables portfolio also contributed to the upside.

Q1 Results in Detail

Other income of Synchrony amounted to $1.2 billion, which surged by a huge margin year over year in the first quarter primarily due to gain on the sale of Pets Best. The metric also rose due to improved growth in interchange and protection product revenues of 3.9% and 22.6%, respectively.

Total loan receivables of SYF grew 11.6% year over year to $101.7 billion and surpassed our estimate of $100.2 billion in the quarter under review.

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

The purchase volume of Synchrony advanced 2% year over year to $42.4 million in the first quarter. However, the figure lagged our estimate by 4.3%.

Interest and fees on loans of $5.3 million improved 15% year over year, on the back of a growing average loan receivables portfolio, increased benchmark rates and lower payment rates. However, it missed our estimate by a small margin. Net interest margin deteriorated 67 basis points (bps) year over year to 14.55%.

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

Total other expenses of SYF amounted to $1.2 billion, up 7.8% year over year and surpassing our estimate by 3.8%. The efficiency ratio of 25.1% deteriorated 990 bps year over year in the quarter under review.

Individual Sales Platforms' Update

Home & Auto period-end loan receivables climbed 10% year over year to $32.6 billion on the back of lower payment rates. However, the purchase volume of $10.5 billion declined 3.2% year over year in the first quarter. Interest and fees on loans grew 12.8% year over year to $1.4 billion, missing our estimate by a small margin, on the back of growth in loan receivables and increased benchmark rates.

Digital period-end loan receivables of $27.7 billion rose 11.2% year over year in the quarter under review on lower payment rates and higher purchase volume. Purchase volume was $12.6 billion, up 3% year over year on the back of growing average active accounts and better customer engagement. Interest and fees on loans climbed 15% year over year to $1.6 billion, missing our estimate by 3.2%, driven by growth in loan receivables, higher benchmark rates, maturing newer programs and lower payment rates.

Diversified & Value period-end loan receivables grew 11.2% year over year to $19.6 billion in the first quarter on higher purchase volume and decreased payment rates. Purchase volume of $14 billion improved 4.3% year over year, attributable to solid in and out of partner spending. Interest and fees on loans advanced 13.5% year over year to $1.2 billion, beating our estimate by 2.2% on higher loan receivables and benchmark rates.

Health & Wellness period-end loan receivables of $15.1 billion rose 19.7% year over year in the quarter under review on increased promotional purchase volume and reduction in payment rates. Purchase volume climbed 7.9% year over year to $4 billion on the back of strong active accounts growth, mainly in Dental, Pet and Cosmetic. Interest and fees on loans improved 18.2% year over year to $869 million, which outpaced our estimate of $825 million on higher volume and loan receivables.

Lifestyle period-end loan receivables advanced 10.6% year over year to $6.6 billion in the first quarter on growing purchase volume and reduced payment rates. Purchase volume of $1.2 billion declined 4.5% year over year, due to lower transaction values. Interest and fees on loans climbed 14% year over year to $255 million, which lagged our estimate by 12.8%.

Financial Position (as of Mar 31, 2024)

Synchrony exited the first quarter with cash and equivalents of $20 billion, which increased from $14.3 billion at 2023-end.

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

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

SYF’s balance sheet was consistently strong in the reported quarter, with total liquidity of $24.9 billion accounting for 20.5% of its total assets.

Return on assets of 4.4% improved 210 bps year over year in the first quarter, and return on equity improved 1,740 bps year over year to 35.6% in the same time frame.

Capital Deployment

Synchrony returned capital worth $300 million through share buybacks and paid common stock dividends of $102 million in the first quarter of 2024. The company’s board approved a new share repurchase plan to buy shares worth $1 billion through Jun 30, 2025. It had a leftover share buyback capacity of $1.3 billion.

2024 Guidance

The company earlier expected loan receivables growth to be around 6-8% for 2024. In 2023, loan receivables registered 11% year-over-year growth. The company anticipates payment rate moderation to continue but stay above the pre-pandemic levels.

Net interest income was anticipated to be around $17.5-18.5 billion, indicating an improvement from the previous year’s figure of $17 billion.

Net charge-offs were projected to be around 5.75-6%, which indicates an increase from the 2023 reported figure of 4.87%. The company expects net charge-offs to be at the highest during the first half and then reach pre-pandemic levels for the remainder of 2024.

Management expects RSA/Average Loan Receivables to range between 3.5% and 3.75% in 2024, reflecting normalization in credit, high interest expense and portfolio mix being offset by improved purchase volume.

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

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

The consensus estimate has shifted 9.25% due to these changes.

VGM Scores

Currently, Synchrony has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Synchrony has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

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

Globe Life reported revenues of $1.4 billion in the last reported quarter, representing a year-over-year change of +3.9%. EPS of $2.78 for the same period compares with $2.53 a year ago.

Globe Life is expected to post earnings of $2.89 per share for the current quarter, representing a year-over-year change of +10.7%. Over the last 30 days, the Zacks Consensus Estimate has changed +0.1%.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Globe Life. Also, the stock has a VGM Score of A.

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