Warren Buffett's legendary stock selection has made him one of the best investors ever. While it is not clear how long the stocks will remain in Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) portfolio, which may be in the Oracle of Omaha's footsteps be profitable.
Unfortunately, Berkshire reports its holdings only once every quarter, weeks after the end of the previous quarter. For this reason, it is rare for investors to buy shares at the same price as Berkshire Hathaway did. However, one exception could be Synchrony Financial (NYSE: SYF) . After losing its contract with Walmart (NYSE: WMT) on a private label credit card in July, the company's share book value level has dropped to most recently in the second quarter of 201
What It Does
Synchrony Financial is a consumer credit company that was spun off in 2015 from General Electric . It manages private label credit cards for various retailers, including Amazon.com and until recently Walmart
The private label credit card business historically, offers more attractive business margins, but it's riskier because applicants tend to have lower credit scores, and cardholders tend to fall more likely to commit delinquency.
Synchrony Financial showed up in the second quarter of 2017 as a stake in Berkshire Hathaway's portfolio, following a sale of 30% exit into shares caused by the company's greater than expected rate of loan loss provisions In particular, Synchrony put $ 1.3 billion in provisions this quarter, which was around $ 400 million more than a nicipated. The increase was driven by net write-downs, which increased from 4.74% in the fourth quarter of 2016 to 5.33%.
The challenges meant that the earnings of Synchrony in the first quarter of 2017 were modeled at $ 0.12 compared to the Wall Street industry.
After the Q1 results were reported, shares in Synchrony collapsed and by June 2017, they traded at around $ 27, resulting in a price-to-book ratio of around 1.5 and a 12-month back price. Profit ratio of about 10
Berkshire has not specifically said why it has bought Synchrony Financial Stocks. However, it is a good bet that the increase in depreciation would prove temporary; If that was the case, the discount rack rating offered the company an opportunity one could not give up.
Another Opportunity to Buy Gifts
Berkshire Hathaway did not buy or sell shares in Synchrony Financial in Q2 2018, as it currently holds 20.8 million shares worth $ 659 million. For Berkshire, with its portfolio valued at over $ 200 billion, this position is quite a position to make Berkshire the sixth largest institutional owner of Synchrony Financial shares.
It is not clear whether Berkshire is interested in buying more shares in Synchrony. But the revelation that Synchrony and Walmart could not agree on a contract extension has led to a further weakening of the lender's share price. As a result, both the price-to-book ratio and the price-to-earnings ratio have returned to levels similar to those seen when Berkshire bought shares last year.
There's no denying that the loss of a major trader like Walmart is a negative to Synchrony's end result. Management told investors during the second-quarter conference call that it considers two options for its old Walmart business possible: it can sell the portfolio or it can convert accounts into a Synchrony credit card. According to the company, both scenarios replace any lost earnings per share due to the loss of Walmart. In addition, both revenues are profitable compared to what would have happened if Synchrony had agreed to extend with Walmart on less attractive terms.
The sale of the portfolio would create a capital of $ 2.5 billion for acquisitions, repurchases and dividends. In addition, a sale at cost savings of up to $ 350 million and lower credit quality would improve the company's net rebate rate by up to 70 basis points, up 5.97% in the second quarter.
If management keeps the portfolio, switching its accounts to its own brand card would give it more cross-marketing options for its direct client business while reducing costs. Synchrony plans to decide which route to take no later than Q1 2019.
What to see next
The Walmart contract expires next summer. Until then, investors will want to watch the default rates to see if the latest improvements continue. Last year, the company became more selective with permits; As a result, only 4.17% of claims in Q2 were more than 30 days overdue compared to 4.52% in the first quarter and 4.25% in the previous year. Only 1.98% of claims were more than 90 days overdue, down 2.28% in the first quarter, and that was the lowest value since the second quarter of 2017.
Investors will also want to see how smoothly Synchronys recently performed Acquisition of [6,99 Milliarden] The loan financing business of PayPal is in progress. The deal, which closed in July, gave Synchrony a portfolio of $ 7.6 billion in claims, which historically grew faster than the Walmart business.
Is it a purchase?
There are question marks because we do not yet know what management will do with the old Walmart business. However, the economy remains strong and that supports wages. Combined with its stricter underwriting, this should help the company limit delinquency and withdrawal rates.
If so, then I think Synchrony is an attractive value stock that you can buy now. The company is increasingly receiving more funds through cheaper deposits at its direct bank to support its profitability. In the last quarter, the company announced a $ 2.2 billion buyback program to help it bottom out below the stock price.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Todd Campbell owns shares of and The Motley Fool owns shares of and recommends AMZN and PYPL. The Motley Fool recommends Berkshire Hathaway (B-shares). The Motley Fool has a disclosure policy.