Consumer Finance Should Be The Star of The 1Q21 Earnings Season, Says Morgan Stanley
Consumer finance should be the star of the first-quarter earnings season, which will start hitting the wire the week after next, according to analysts at Morgan Stanley who expect that to light a fire under the stock.
“1Q21 earnings will be full of good news. Our reopening trade stocks best positioned: Synchrony Financial (SYF), Capital One Financial (COF), Alliance Data Systems (ADS). Quarter should come with details on improving consumer spend, larger than expected reserve release and outlook for increasing buybacks. Value rotation a plus too for SEIC,” said Betsy L. Graseck, equity analyst at Morgan Stanley.
Synchrony, which will announce its first-quarter 2021 financial results on April 27, 2021, is expected to post earnings per share of 1.29, representing year-over-year growth of over 122% from $0.58 per share seen in the same quarter a year ago.
In the last four consecutive quarters, on average, the company has delivered an earnings surprise of 14%.
Synchrony Financial’s shares, which slumped about 4% in 2020, surged nearly 20% so far this year.
Eleven analysts who offered stock ratings for Synchrony Financial in the last three months forecast the average price in 12 months at $46.20 with a high forecast of $54.00 and a low forecast of $36.00.
The average price target represents an 11.03% increase from the last price of $41.61. Of those 11 equity analysts, ten rated “Buy”, one rated “Hold” while none rated “Sell”, according to Tipranks.
“Synchrony is one of the most levered banks to lower unemployment + improving vaccination trends, as it has the single highest level of excess capital + reserves in our coverage, at 20% of market cap, which should come back through in the form of ramping buybacks,” Morgan Stanley‘s Graseck added.
“Indeed, we look for $2.8B of buybacks in 2021 and $2.8B in 2022, or 70%/45% above consensus expectations. 2) Valuation is compelling with its forward 2023 PE trading a full turn below consumer finance peers, at ~6x vs. ~7x. We look for 33% upside to our $54 PT, based on 9x 2023e EPS of $6.61 discounted back 1 year by 10%.”
Capital One Financial, which will announce its first-quarter 2021 financial results on April 27, 2021, is expected to post earnings per share of 4.30, up from -3.06 per shares seen in the same quarter a year ago.
Alliance Data Systems is expected to post earnings per share of 4.30, up from -3.06 per share seen in the same quarter a year ago.
“These stocks are cheap at 7x our 2023 Normalized EPS. Catalysts abound with post-vaccine mobility accelerating (Baking Bread into the Valuation) and the Fed recently announcing that buybacks can increase in 2H21 (Fed Lifts Payout Restrictions Putting Bank Boards Back in Charge of Payouts),” Morgan Stanley‘s Graseck added.
“Expect managements to discuss strong and accelerating consumer spend, accelerating reserve releases, and accelerating buybacks. We enter the quarter 4%, 13% and 5% above 1Q21 consensus for SYF, COF and ADS. Expect that the direction of travel is towards our bull case as credit is coming in better faster. For SYF and COF, accelerating buybacks push the direction of travel towards our bull case.”
Check out FX Empire’s earnings calendar