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Credit card issuer says the "consumer is back"

Synchrony Financial (SYF) certainly has its finger on the pulse of the American consumer. The company is the biggest U.S. issuer of private-label credit cards and has agreements with retailers including Wal-Mart (WMT) and Amazon.com (AMZN). In October, it released a note with its holiday sales forecast for this year. Synchrony is forecasting sales will grow 3.5 percent. The company’s outlook is based on a few indicators such as unemployment, gas prices and private housing construction. Synchrony assumes will top seasonally adjusted sales figures for 2013 by more $17 billion. In the video attached above, Synchrony CEO Margaret Keane says the findings are in line with what they’ve been seeing. “I think the good news is the consumer is back. I think one thing I would say is though they are being thoughtful and conservative in how they are thinking about their spend, and I think most consumers are looking for a deal,” she explains.

Synchrony, formerly known as GE Capital retail finance, was spun off in July this year. The bank raised $2.88 billion in one of the biggest U.S. initial public offerings this year. GE (GE) still owns 85 percent of the company. In the third-quarter, profit beat analysts’ estimates in Synchrony’s first report as a publicly traded company. The shares have climbed more than 26% since its IPO, compared with the 6% climb of the 230-company Russell 1000 Financial Services Index (^RUI).

GE said it will exit its stake fully after receiving regulatory approval. That will likely happen in late 2015. Keane says Synchrony is preparing the transition. “The first (move) is we have to file an application to get approval from the Fed to separate from GE. So that’s a big process, we have a whole team working on that. The second is really...building out the infrastructure. You know, building our own data centers, new payroll systems,” she said.

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J.P. Morgan analyst Rick Shane has an overweight rating on the stock. In the most recent quarter, Synchrony’s net interest margin of 17.1% beat his estimate by 0.6%. In his most recent note, he sees separation headwinds (higher operating expenses and funding costs). However, Shane says "at steady state (several years away), we believe SYF’s business should generate a combination of (1) double- digit EPS growth, (2) mid- to high-teens ROE, and (3) the ability to return substantial capital."

Daniel Werner, analyst at Morningstar, has a hold on the stock and says the timing for the spinoff is good for both GE and Synchrony as the U.S. heads into a stronger consumer environment. Especially because the company has card partnerships with retailers such as Wal-Mart, Lowe’s and they recently signed up with Apple Pay for participating dual cards. Keane’s focus is to bring in both sales and consumers for the retailers through the loyalty programs on their store cards. She also wants to make sure their cards are in consumers’ electronic wallets as the mobile pay business is exploding. Synchrony is bolstering systems to thwart hackers and working with retailers on ways to prevent fraud.

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