Banking, finance, and taxes

Deep Earnings Losses Seen in 2020 for 2 Consumer Credit Leaders

Jon C. Ogg

Published: April 14, 2020 11:29 am

Watching the bull market turn into a bear market was hard enough, but to imagine that stocks have now recovered half of all their losses is becoming equally as difficult to justify. Endless trillions in bailouts and some glimmer of hope that the U.S. news flow around COVID-19 has peaked are the obvious drivers. If the old mantra that earnings ultimately drive stock prices is still even remotely true, then what is supposed to happen when earnings and expectations go lower and lower?

Analysts on Wall Street have been lowering expectations for most companies that are economically sensitive for weeks now, but it’s becoming very difficult to decipher the noise from the excitement — and equally difficult to decipher the noise from the panic. According to Nomura/Instinet, the risks are not currently discounted when it comes to U.S. consumer credit issuers.

A credit report from Instinet’s Bill Carcache notes that dividend cuts and dilutive capital raising efforts are not currently priced into the shares of some credit issuers. The bounce off the lows from March comes with a lack of confidence, even if the analyst is bullish on the longer-term outlooks for credit card issuers.

Synchrony Financial (NYSE: SYF) was rated as Neutral, but the old price target of $34 was slashed to $16 as the earnings estimate was taken down to −$5.26 per share (from $3.92) for 2020. The firm’s 2021 estimate was taken down to $1.61 EPS (from $4.48 EPS). Carcache sees long-term value despite more near-term uncertainty, but he is more cautious on Synchrony due to its higher exposure to retail partners. Shares down over 50% from the highs should discount much of the negative news. That said, he thinks it is still too early to get more bullish and is awaiting a better entry point.

Ally Financial Inc. (NYSE: ALLY) was rated as Buy, and Instinet’s price target was lowered to $31 from $36. The EPS targets were lowered to −$1.86 for 2020 (from $4.27) and to $2.43 EPS (from $4.78) for 2021. Carcache sees near-term headwinds bringing lower recovery rates due to unprecedented levels of unemployment that are coming. That means higher charge-offs and increasing reserves.

Carcache’s report said:

Unprecedented levels of fiscal, monetary, and regulatory support should provide relief, but we think the reality of high unemployment on unsecured lenders will likely lead volatility to persist in the near term. Our longer-term bullishness on the group is rooted in our belief that consumer credit stocks will enjoy meaningful upside torque to the positive EPS inflection that we expect in 2021. Although some may be willing to dismiss 2020 earnings as irrelevant, we believe the 2020 base is significant because it will influence the EPS growth trajectory for 2021. Tactically, we would seek to average into consumer credit stocks on their way lower in the near term if our view is right; we think this strategy would position investors for meaningful longer-term upside in the group.

What stands out in this combined analyst report are the wide losses for 2020 that are now expected, followed by earnings now projected to only be about half of what was anticipated for 2021. The Refinitiv consensus estimates are for Synchrony still to post a $1.75 EPS in 2020 and $3.48 EPS in 2021 (versus $4.29 EPS in 2019). The same consensus estimates for Ally are $3.63 EPS in 2020 and $4.17 EPS in 2021 (versus $3.72 EPS in 2019).

Despite a surge in stock prices for the Dow Jones industrials and S&P 500 on Tuesday morning, these two stocks were trading handily lower after these cuts. Synchrony Financial stock was down 3.4% to $15.66, in a 52-week range of $12.15 to $38.18. Ally Financial stock was down 4.8%, at $14.99 in a 52-week range of $10.22 to $35.42.

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