We all invest for different reasons, and we all have different goals, metrics, and ways to refine our research in the process of buying a new stock. Like most investors, when I add a new position to my portfolio, I do a lot of due diligence to determine if the investment is warranted.
To me, there is currently a stock that ticks all of my boxes and looks like a great buy: Synchrony Financial (NYSE: SYF). Here’s why this credit card issuer is the next stock I’m going to buy.
Good value for money
Synchrony Financial is the 10th largest credit card issuer in the United States, with a rate of 2% market share. Synchrony is different from other credit issuers – banks that provide the loans for credit card purchases – in that it mainly offers store branded credit cards, the ones that can only be used for purchases at that specific store, with rewards and perks as an incentive.
The bank offers more than 100 store cards, including the Amazon.com store card, which is used only for Amazon purchases. He’s got cards with American Eagle, Difference, Walmart, and Midas, to name a few. It also has around thirty cards bearing the store’s brand but forming part of the Visa Where MasterCard networks, so they can be used anywhere. These include offers from Pay Pal, Banana Republic, and eBay.
The past year has been difficult for Synchrony due to the pandemic and the resulting economic shutdowns in the United States. Consumer spending has declined for a variety of reasons, from closed stores to job losses. As a result, Synchrony saw its profits drop in the first three quarters of the year.
But they rebounded in the fourth quarter to $ 738 million, a slight increase from the fourth quarter of 2019. This was due to mostly flat purchase volume on cards, lower credit losses due to from improving the economy and aggressively cutting spending. initiative in 2020 which reduced spending by 7% over one year. As a result, the share price surged in the fourth quarter and ended the year mostly flat.
This positive momentum continued into 2021, as the stock is up around 17% through Wednesday’s close. The gains in the first quarter were due to improving economic conditions, supported by the relaunch and the rollout of vaccines, which generated more consumer spending. Nonetheless, the stock remains a solid value, trading at around 18 times earnings with a price to book ratio of 2.
Financial good and catalysts
Another reason I like Synchrony is its financial strength. As it is an online bank, it has no branches and relatively low overheads resulting in high operating margins, many cash flow, and a low efficiency rate of 37%. The efficiency ratio measures spending relative to revenue, so a lower efficiency ratio means the business is spending less relative to earned revenue. This produces a high operating margin of 37% and a substantial amount of cash flow, approximately $ 7.5 billion.
This is a solid financial foundation on which to grow, as consumer spending is expected to take off in 2021, primarily around the second half of the year and into 2022. Synchrony has also regularly added new partners. It signed 25 new agreements in 2020, notably with Walgreens, Verizon, and Venmo, which is PayPal’s mobile payment application. The Venmo Visa card, in particular, could be a significant revenue driver for Synchrony, given its huge (around 47 million) and growing number of users. In addition to the card, it has a QR code for contactless payments in stores.
It’s no wonder analysts are bullish on Synchrony, given its financial data and value, as well as improving macro conditions and key enablers. It looks like the next stock I’m going to buy.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.