This Warren Buffett Stock Is Dirt Cheap Right Now
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Warren Buffett has amassed a large portfolio of bank stocks for Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) with major holdings in Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and American Express (NYSE: AXP), just to name a few of the most well-known and largest investments.
However, one lesser-known Buffett bank stock, Synchrony Financial (NYSE: SYF), could be the most compelling value of all. Synchrony is a major issuer of store-branded credit cards and also operates a rapidly growing online banking platform. After it dramatically underperformed the banking sector thanks to the loss of a key relationship, now could be the time to put this dirt-cheap Buffett bank stock on your radar.
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Strong earnings growth, and it's not just from tax reform
Synchrony Financial posted third-quarter earnings of $0.91 per share, which was not only well ahead of expectations but represented 30% year-over-year EPS growth. Sure, tax reform has a lot to do with this, but with 8.5% annual revenue growth, it's fair to say that Synchrony's business is growing nicely.
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Just to run through a few of the growth metrics, Synchrony's net interest income was 9% greater than a year ago, and the purchase volume on its credit cards increased 11%.
Synchrony's online banking platform is perhaps the most impressive part of the quarter, with $8 billion of deposit growth in the company's high-yield savings accounts and CDs -- a 14% year-over-year growth rate.
A highly profitable business model
The store credit card business can be a rather profitable one. Although store credit cards tend to have higher default rates than standard credit cards, their higher interest rates more than make up for the difference. In fact, Synchrony's net interest margin for the quarter was 16.4% -- well in excess of that of most traditional credit card issuers.
And because of its branchless banking model and generally efficient operations, Synchrony delivers some of the best profitability metrics in the sector. The bank's return on assets (ROA) of 2.7% and return on equity (ROE) of 18.5% are both much greater than the respective 1% and 10% financial industry benchmarks, and its 31% efficiency ratio would make most other banks jealous.
Finally, while credit quality has become more of a concern recently with rising consumer debt levels, Synchrony's latest numbers don't give investors much cause for concern. Net charge-offs ticked up, but by only two percentage points. And the 30-plus-day delinquency rate is actually 21 basis points lower than it was in the third quarter of 2017.