Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Synchrony Financial is the latest company to receive a ringing endorsement from Warren Buffett's Berkshire Hathaway Inc. What's the takeaway for the rest of us?

The $24 billion issuer of private-label and other credit cards saw its stock surge more than 6 percent in after-hours trading on Monday after a Berkshire filing revealed that the conglomerate is now a top 10 shareholder, with a stake of roughly 2.2 percent. It's unclear if Buffett himself or one of his two lieutenants (Todd Combs or Ted Weschler) sniffed out Synchrony, but there are a couple of immediate explanations for the Berkshire position.

Credit Check
Berkshire's bet on Synchrony comes amid comparatively strong loan growth for the credit-card issuer, some of which is attributable to its partnership with Amazon
Source: Jefferies estimates

The first? Nobody in Omaha must be losing sleep about worsening trends in consumer credit, which my colleague Lisa Abramowicz has rightly noted could lead to losses but is unlikely to cause a 2008-style meltdown. The Synchrony investment pairs with Berkshire's commitment to its longtime American Express Co. stake., which has grown to roughly 17.2 percent. Berkshire is obviously comfortable enough to amp up exposure to this risk, regardless of the Federal Reserve's close scrutiny of potential defaults at financial firms in its recent bout of stress tests. 

Some of Berkshire's bullishness may hinge on a view that the delinquencies being recorded by U.S. credit-card companies like Synchrony are due to tweaks in underwriting standards and portfolio expansion, rather than weakening consumer credit. 

And if the fate of consumer credit isn't a concern, then there's a lot to like about Synchrony. The company issues credit cards on behalf of retailers like Amazon.com Inc., Wal-Mart Stores Inc. and Lowe's Cos. Inc. and has seen its haul from interest and fees on loans climb steadily in recent years. Notably, it has intentionally pulled back from courting subprime borrowers, with CEO Margaret Keane stating in June that the company now tends to avoid providing credit to folks with FICO scores that are below 620. 

Banking on Bucks
Berkshire Hathaway's Synchrony Financial bet was likely spurred by metrics including the expectation of rising interest and fees on loans
Source: Bloomberg, D.A. Davidson & Co. (for estimates)

Another plus? Synchrony's net interest margin is so much wider than its peers: 

Make It Rain
Rising interest rates have had little impact on Synchrony's net interest margin
Source: Bloomberg Intelligence
*Data as at June 30, 2017

Berkshire is also a notorious bargain hunter. While it may not pay much attention to Wall Street's research analysts, it's notable that they're on the same page, with 70 percent -- or 17 of 24 -- recommending investors buy Synchrony shares.

Value Play?
Out of the U.S. credit card issuers, Synchrony has the most "buy" recommendations from Wall Street analysts
Source: Bloomberg

Before Berkshire's stake revelation, Synchrony traded at a forward price to earnings multiple of roughly 9.2, a discount to the industry's average of 10.5. The company was on track to narrow the gap over time. Berkshire's arrival has just accelerated the process. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net