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Synchrony (SYF) Up 12% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Synchrony (SYF - Free Report) . Shares have added about 12% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Synchrony due for a pullback? 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 drivers.

Synchrony Financial Q3 Earnings Miss Estimates, Down Y/Y

Synchrony Financial’s third-quarter 2020 earnings per share of 72 cents missed the Zacks Consensus Estimate by 13.3%. Further, the bottom line plunged 41% year over year due to muted revenues.

Results in Detail

The company’s net interest income decreased 21.2% to $3.5 billion in the third quarter due to the impact of the Walmart consumer portfolio sale and the COVID-19 pandemic.

However, its other income increased 54.1% to $131 million, primarily attributable to lower loyalty program expenses.

In the quarter under review, loan receivables declined 6% year over year.

Deposits were $63.5 billion, down 4% from the year-ago quarter.

Provision for credit loss increased 19% year over year to $1.2 billion on the back of Walmart-related prior-year reserve reduction and a hike in reserve induced by COVID-19 related losses. The same was partly offset by lower net charge-offs.

Total other expenses rose 0.3% year over year to $1.07 billion due to the restructuring charge and expenses related to the COVID-19 pandemic.

However, the same was offset by decreased cost from Walmart, lower purchase volume and accounts, and reduced discretionary cost.

Sales Platforms Update

Retail Card

The company’s interest and fees on loans fell 27% year over year due to the sale of the Walmart consumer portfolio and lower loan receivables.

Loan receivables were down 6% due to COVID-19 impact while the average active accounts declined 19%.

Payment Solutions

Interest and fees on loans dropped 10% year over year owing to lower late fees. Loan receivables slid 5% year over year.

Purchase volume contracted 6% while average active account slipped 7%.

CareCredit

Interest and fees on loans decreased 8% year over year due to fall in merchant discount as a result of shrinkage in purchase volume.

Loan receivables were down 7% year over year on account of the coronavirus impact.

While purchase volume decreased 3%, the average active account fell 8%.

Financial Position

Total assets as of Sep 30, 2020 were $95.6 billion, down 9.7% year over year.

Total borrowings as of Sep 30, 2020 were $15.7 billion, down 22.6% from the year-ago quarter.

The company’s balance sheet was consistently strong during the reported quarter with total liquidity of $26.8 billion reflecting 28% of total assets.

While return on assets was 1.3%, the return on equity was 10.3%.

Efficiency ratio was 39.7% in third-quarter 2020.

Capital Deployment

During the quarter under consideration, the company returned $129 million in capital through common stock dividends.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -8.45% due to these changes.

VGM Scores

At this time, Synchrony has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

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


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