Dave Sather of Sather Financial Group presented his in-depth investment thesis on Synchrony Financial (US: SYF) at Best Ideas 2020.

Thesis summary:

Synchrony Financial is the largest provider of private-label credit cards and provides various financing solutions to businesses, retailers, and consumers in the United States. Although SYF was spun out of General Electric just in 2014, the business traces its roots back nearly nine decades as a way for people to finance the purchase of GE household appliances during the Great Depression.

Today, Synchrony is not just a bank but also a data analytics business that helps empower partners to make decisions and learn more about their end-consumers. Its proprietary closed-loop networks captures more granular level of transactional data than open-loop networks such as Visa or Mastercard can offer. This value proposition creates switching costs for partners, which can be quantified, as the median length of relationship is more than twelve years.

Fears of a mass exodus after the Walmart non-renewal and a “retail apocalyse” after the Toys“R”Us bankruptcy have proved an overreaction. 2019 was a successful year for SYF in renewing all major partners and expanding the PayPal/Venmo relationship as well as its unique health care financing platform, CareCredit, which focuses on elective procedures and veterinary care.

Synchrony’s loans receivables and deposit base are growing faster than those of peers, all while asset quality and chargeoff rates are improving. Synchrony’s net interest margin of 15% and an efficiency ratio of 31% are unheard of in the financial sector. Management has returned significant cash to owners, with a shareholder yield of 11+%. At a trailing PE of ~8x and a long-term conservative DCF calculation of $55 per share, SYF is attractively valued, with favorable risk-reward dynamics at recent prices.

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About the instructor:

Dave Sather is a CFP and President of Sather Financial Group, a $800 million firm managing individual accounts, in Victoria, Texas. Dave has degrees in business from Texas Lutheran University and Texas A&M University. Dave is also Chairman of the Board of Business Bank of Texas and serves on the Investment Committee and Board of Regents at Texas Lutheran University. He developed and teaches the Bulldog Investment Company internship at Texas Lutheran University (www.BulldogInvestmentCo.com).