GE's Synchrony IPO a Safe Bet on Big Box Retail Recovery
NEW YORK ( TheStreet) -- General Electric's
The GE-owned company plays in perhaps the most profitable part of the struggling world of big box retail . Synchrony Financial provides private label credit cards to large retailers across the U.S. and its customers can be seen as some of the most loyal shoppers left in the retail universe. Synchrony's average customer has had their branded credit card for 7.7 years, and the average customer made over a dozen purchases per retail credit card.
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Synchrony's average customer also appears to be in a relatively sound financial position. The company's average customer account had a FICO score of 710, and total loan receivables had a weighted average FICO score of 694. Over 70% of those total loan receivables were with accounts carrying a prime FICO score.
That loyalty and financial standing makes Synchrony's average customer highly coveted by its retail partners . Synchrony's top five partners, Walmart, Sams' Club, Lowe's
If sales growth at retailers like Walmart, J.C. Penney and Gap is very much in question , Synchrony, by contrast, appears to have strong sales visibility.
"Synchrony Financial has relatively strong revenue visibility due to its stable customer base and strong risk management, which helped it to be profitable throughout the financial crisis," notes BTIG analyst Mark Palmer.
Meanwhile, anyone watching the banking sector in recent years has seen that credit quality continues to improve. Synchrony may see an outsized benefit from a continued recovery in the financial health of the U.S. consumer when compared against retailers. Recovering consumers would, at once, improve Synchrony's credit expense and potentially also boost overall purchase volumes.
Valuation, however, presents a challenge for potential Synchrony investors. The company priced its IPO at the low-end of its range. On one of the worst days for stock markets in 2014, Synchrony closed at its IPO price of $23 a share.
BTIG's Palmer believes Synchrony shares could rise to $30 based on his forecast that the company could earn $2.52 a share by 2016 vs. the $2.21 a share in EPS the company earned in 2013. Palmer's $30-a-share price target, however, hinges on Synchrony achieving a price of 12 times 2016 earnings per share, a premium to competitors such as Discover Financial Services