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Synchrony's Investors Have 2 Big Reasons to Smile

Motley Fool Staff, The Motley Fool

Synchrony Financial (NYSE: SYF) had been beaten down in the latter half of 2018. Not only did Walmart (NYSE: WMT) decide to terminate its co-branding partnership with Synchrony, but the big-box retailer filed an $800 million lawsuit against the bank. Along with strong fourth-quarter earnings, Synchrony's investors learned that not only has the lawsuit been dropped, but Walmart-owned Sam's Club is remaining a Synchrony partner.

In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel discuss Synchrony's latest news.

A full transcript follows the video.

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This video was recorded on Jan. 28, 2019.

Jason Moser: Let's take a look at this. Back in November, Matt, we took a listener question from @BTCapital12 on Twitter. There was a situation brewing with Synchrony and Walmart and litigation that the massive retailer was threatening. Matt, I'll let you take a little bit of a victory lap here. I'm going to go ahead and hand it to you. Explain away.

Matt Frankel: Thank you for giving me my I-told-you-so moment. [laughs] In the middle of last year, over the summer, Walmart announced they were dropping Synchrony as their co-branding partner. Big account. I liken this to, using another Amex comparison, when Amex lost Costco. It's to that magnitude. It's a big deal to them. But the real drama came a little bit later.

One, as everyone knows, Walmart and Sam's Club are the same company, but they're two different credit card products, in terms of Synchrony's line of products. There was a big question mark as to what this meant for their Sam's Club business, which is also a huge part of Synchrony's business. Do they keep that? Does that go to Capital One, where Walmart's going? Two, Walmart announced that they were suing Synchrony for $800 million related to losses on their credit card portfolio. They said Synchrony didn't do a good job of analyzing credit risk, and there were bigger losses than expected, and they weren't making as much money as a result. That was a big question overhanging.

I forget my exact words, but I said that it was somewhat of a negotiation tactic, because Synchrony had to decide whether it wanted to keep the Walmart loan portfolio, sell it to Capital One or somebody else. There were a few things that needed to happen before the relationship could be completely dissolved.

Just recently -- this was also a big surprise of earnings season -- not only did Synchrony have a great quarter, but they pretty much said the two things investors really, really wanted to hear: that they're keeping the Sam's Club business, the Sam's Club credit card will remain a Synchrony product. That's a big deal. And, even bigger, Walmart is completely dropping its lawsuit against Synchrony. An $800 million weight off their shoulders is a very nice late Christmas present for Synchrony investors.

The market hates uncertainty. Uncertainty has been lifted in regard to the litigation risk. Sam's Club is still a Synchrony product, so the hit they took from the Walmart loss is now just confined to their Walmart product. This is a big win for Synchrony shareholders, which we're seeing reflected in the share price, but Synchrony still trades for very cheap multiple. They're a very economically sensitive business. Store credit card default rates tend to really move with recessions and things like that. But their profit margin is so great that it would literally take another Great Recession to really put them in the red. So, I think the market's fears in that regard are overblown. We just got some great relief. The business did really, really well this past quarter and this past year. I still love Synchrony as a stock. Shareholders who listened to me last year got handsomely rewarded this past week. [laughs]

Moser: Hey, now, everybody!

Frankel: I wish I would have shut up about it and bought some myself. Unfortunately, that wasn't the case.

Moser: [laughs] Yeah, that's not our job, I guess. But hey, it sounds like all's well that ends well. Good call. I remember the show, talking about that. For listeners, for posterity, go back to that November show, listen to what Matt said because he nailed this one. Good job, Matt!

Jason Moser owns shares of TWTR. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TWTR. The Motley Fool recommends COST. The Motley Fool has a disclosure policy.