Markets

A Side-by-side Analysis of Synchrony Financial (SYF) and Capital One Financial Corporation (COF)

Synchrony Financial (NYSE:SYF) shares are down more than -13.32% this year and recently increased 0.42% or $0.13 to settle at $31.44. Capital One Financial Corporation (NYSE:COF), on the other hand, is up 0.07% year to date as of 10/09/2017. It currently trades at $87.30 and has returned 1.61% during the past week.

Synchrony Financial (NYSE:SYF) and Capital One Financial Corporation (NYSE:COF) are the two most active stocks in the Credit Services industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect SYF to grow earnings at a 8.87% annual rate over the next 5 years. Comparatively, COF is expected to grow at a 7.00% annual rate. All else equal, SYF’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 51.89% for Capital One Financial Corporation (COF). SYF’s ROI is 23.90% while COF has a ROI of 14.00%. The interpretation is that SYF’s business generates a higher return on investment than COF’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. SYF’s free cash flow (“FCF”) per share for the trailing twelve months was +2.06. Comparatively, COF’s free cash flow per share was +6.87. On a percent-of-sales basis, SYF’s free cash flow was 10.84% while COF converted 12.08% of its revenues into cash flow. This means that, for a given level of sales, COF is able to generate more free cash flow for investors.

Financial Risk

SYF’s debt-to-equity ratio is 1.44 versus a D/E of 0.95 for COF. SYF is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SYF trades at a forward P/E of 9.84, a P/B of 1.76, and a P/S of 1.62, compared to a forward P/E of 10.31, a P/B of 0.86, and a P/S of 1.76 for COF. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. SYF is currently priced at a -13.98% to its one-year price target of 36.55. Comparatively, COF is -7.37% relative to its price target of 94.25. This suggests that SYF is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for SYF and 2.50 for COF, which implies that analysts are more bullish on the outlook for COF.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. SYF has a short ratio of 2.19 compared to a short interest of 2.44 for COF. This implies that the market is currently less bearish on the outlook for SYF.

Summary

Synchrony Financial (NYSE:SYF) beats Capital One Financial Corporation (NYSE:COF) on a total of 9 of the 14 factors compared between the two stocks. SYF is growing fastly, generates a higher return on investment and higher liquidity. In terms of valuation, SYF is the cheaper of the two stocks on an earnings and sales basis, SYF is more undervalued relative to its price target. Finally, SYF has better sentiment signals based on short interest.

Previous ArticleNext Article

Related Post

For Evolent Health, Inc. (EVH), It May Be As Good ... Evolent Health, Inc. (NYSE:EVH) has recently been identified as an interesting stock but more in-depth monitoring is needed for a trade decision. Now ...
Does American International Group, Inc. (AIG) Pres... American International Group, Inc. (NYSE:AIG) is in the highlights and many would want to know whether now might be a good time for it to present much...
Drilling Down Into the Books for Athersys, Inc. (A... Athersys, Inc. (NASDAQ:ATHX)'s interesting series of developments are underway around the US stock market these days. Now trading with a market value ...
The TJX Companies, Inc. (TJX) Raising Eyebrows Amo... The TJX Companies, Inc. (NYSE:TJX) is on our radar right now but there could still be some opportunities on the horizon. Now trading with a market val...
Analyzing the Insider Data for Office Depot, Inc. ... Recent insider trends for Office Depot, Inc. (NASDAQ:ODP) have caught the attention of investors. Analysts monitor insider data to understand the sent...