Image Source: Pixabay

As part of our ongoing series here at The Acquirer’s Multiple, each week we focus on one of the stocks from our Stock Screeners, and why it’s possibly a deeply undervalued gem.

The Stock this week is:

Synchrony Financial

Synchrony Financial (NYSE: SYF) is a leading consumer financial services company specializing in offering a wide range of credit products, including private label credit cards, co-branded credit cards, installment loans, and other consumer financing solutions. The company partners with major retailers, healthcare providers, manufacturers, and service providers to deliver customized financing options that drive sales and customer loyalty.

Originally a division of General Electric, Synchrony became an independent company in 2014 after a successful spin-off. Today, it operates across various segments, including retail, health and wellness, home, auto, and more. The company’s extensive portfolio of private-label credit cards includes partnerships with brands such as Amazon, Lowe’s, and PayPal, making it a key player in the consumer lending space.

A quick look at the share price history (below) over the past twelve months shows that the price is up 36.70%.

Source: Google Finance

One of the metrics we use in our screens is IV/P (Intrinsic Value to Price). Let us simplify what it means:

IV/P (Intrinsic Value to Price) tells you if a stock is a good deal or not based on how much value you’re getting for the price you pay. Here’s how it works:

The Calculation:

• It adds up the stock’s ability to make money (Earning Power), grow (Incremental Growth), and pay back investors (Shareholder Yield). This gives you an idea of what the stock is really worth, called its Implied Value.

The Meaning of IV/P:

• If IV/P is greater than 1, it means you’re getting more value than you’re paying for. For example, for every $1 you invest, you’re getting more than $1 of value. That’s a good deal!
• If IV/P is less than 1, it means you’re getting less value than you’re paying for. For example, for every $1 you invest, you’re getting less than $1 of value. That might not be a great deal.

What It’s Used For:

• It’s a quick way to spot undervalued stocks (good deals).
• If IV/P is very low, like 0.6 (you’re only getting 60 cents of value for $1), it’s likely overpriced.

We currently have an IV/P of 1.80 for Synchrony Financial, which means the stock’s Implied Value is calculated to be 1.8 times greater than its current price. In simpler terms:

For every $1 you invest, you’re potentially getting $1.80 of value.

This suggests that Synchrony Financial may be undervalued, presenting an attractive opportunity for value investors.

Possible Reasons for This Undervaluation:

Economic Environment and Interest Rate Trends:

• Rising interest rates impact consumer spending and borrowing habits, leading to potential concerns about credit card delinquencies and loan defaults.
• However, Synchrony Financial benefits from higher net interest margins when rates increase, potentially offsetting risks associated with delinquencies.

Market Perception and Sentiment:

• Consumer finance companies often face cyclical market sentiment, with concerns about economic slowdowns impacting stock performance.
• Investors may be cautious due to uncertainties in consumer credit markets, even though Synchrony’s financial position remains strong.

Operational Performance:

• In its most recent earnings report, Synchrony Financial posted a net income of $774 million for Q4 2024, reflecting a resilient business model despite macroeconomic headwinds.
• The company has consistently maintained strong partnerships with major retailers, ensuring a steady flow of revenue from its credit card and financing products.

Credit Quality and Loan Performance:

• The company has been proactive in managing credit risk, with solid reserves in place to handle potential loan losses.
• While delinquency rates may rise slightly during economic downturns, Synchrony’s diversified loan portfolio and prudent underwriting policies help mitigate significant risks.

Conclusion:

With an IV/P of 1.80, Synchrony Financial appears to be trading at an attractive valuation relative to its intrinsic value. The company’s strong fundamentals, strategic partnerships, and ability to navigate economic fluctuations make it a compelling stock for value investors seeking exposure to the consumer finance sector. While challenges exist, the potential for upside remains significant if the market begins to recognize the company’s true value.

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