BMO Capital says the 15 percent drop in Synchrony Financial SYF shares after the company revised its new credit guidance is an overreaction. Furthermore, the recent pullback creates a "compelling" buying opportunity. However, the shares recovered about 3 percent Wednesday.
"SYF shareholders should benefit from meaningful excess capital (over $6 per share or 25 percent of market value); we expect the initiation of dividends and buybacks (65 percenttotal payout ratio starting in 2H16) in tandem with potential growth by acquisition (of loan portfolios)," analyst James Fotheringham wrote in a note.
Synchrony Financial now sees FY16 net charge-off (NCO) rate at 4.5 percent to 4.8 percent over the next twelve months, up from prior outlook of 4.3 percent–4.5 percent. Additionally, the company anticipates allowance coverage ratio to jump 20–30 bps versus the first quarter level of 5.50 percent.
Fotheringham, who has an Outperform rating on the stock, estimates that 30 percent of the EPS hit expected from higher credit costs will be offset by consequently lower Retailer Share Arrangements (RSAs).
The analyst cut his core 2016 EPS forecast to $2.64 from $2.84 and 2017 EPS view to $2.98 from $3.13. The Street expects EPS of $2.79 for 2016 and $3.09 for 2017.
"[W]e expect systemwide card NCOs to decline (albeit moderately) over the next two years, as the U.S. unemployment rate continues to fall," Fotheringham added.
At the time of writing, shares of Synchrony Financial were up 0.62 percent to $26.61. The analyst cut his price target by $1 to $36, implying 18 percent upside.
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