Barclays Bullish On Synchrony Finance, But Guidance Highlights Risks

In its 8k filing on June 14, Synchrony Financial SYF updated its guidance, indicating that the company expects a 20–30bps increase in NCOs over the next 12 months.

Barclays’ Mark C. DeVries maintains an Overweight rating on the company, with a price target of $41.

“In addition, SYF also indicated that it expects a reserve build starting in 2Q16, that could result in the allowance to loans ratio increasing 20-30bps from the 1Q16 level,” DeVries mentioned.

What The Pullback Means

The stock declined 13 percent on June 14, which the analyst believes “serves as a painful reminder of the sensitivity of consumer finance stocks to changes in credit expectations and also highlights the risk of owning the group in an environment with recessionary concerns.”

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While the revised guidance would only have a modestly negative impact on earnings going forward, DeVries believes that the sell-off reflects “renewed risk aversion,” both to credit and to the lack of clarity regarding what the guidance implies.

“Longer term though, we still think the secular trends favor SYF and the company is set up to outgrow other card stocks in the group,” the analyst said, pointing out that at the current levels, the stock is more than sufficiently discounted for any potential moderate deterioration in credit.

The EPS estimates for 2016 and 2017 have been lowered from $2.91 to $2.76 and from $3.33 to $3.11, respectively.