PayPal's Recent Deal To Sell Consumer Credit Unit Adds $4 To Stock's Fair Value

Paypal Holdings Inc PYPL announced Nov. 12 an agreement with Synchrony Financial SYF, which provided for the latter acquiring $6.8 billion in receivables, including PayPal's U.S. consumer credit receivables portfolio valued at $5.8 billion in receivables.

Following the announcement, one analyst thinks the transaction would add $4 to the fair value of PayPal stock.

The Analyst

Buckingham Research's Chris Brendler reviewed the transaction and its impact on PayPal. He reiterated a Buy rating and raised his target price for the stock from $80 to $84, representing roughly 15 percent upside from current levels.

The Thesis

Brendler likes the deal due to three key reasons, including the positive implications of the deal for the core payments business. The proposed sale removes credit risk materially, improving the risk profile and enabling multiple expansion, Brendler added.

With the sale of the credit business, which was a significant drag on free cash flow, the analyst sees not only freeing up of over $1 billion annually but also a $6 billion war chest for M&A and buyback.

Buckingham's analysis of the financial impact of the transaction showed revenue headwinds larger than what the management guided. The firm expressed confidence in its projections, not only for the lost credit revenues but also for Synchrony Financial co-brand partnership and Synchrony Financial profit sharing.

"With such strong momentum in payments platform, we expect PYPL to more than offset the additional ~ $100M Credit revenue headwind and ultimately exceed the new 16.5% top line guidance for 2018," the firm said in a note.

Price Action

PayPal shares ran up strongly in the year-to-date period, having gained roughly 87 percent. The stock traded around $75.72 at time of publication, up 3 percent.

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