Synchrony Financial (NYSE:SYF) shares are up more than 2.98% this year and recently increased 0.25% or $0.1 to settle at $39.76. American Express Company (NYSE:AXP), on the other hand, is up 1.43% year to date as of 01/11/2018. It currently trades at $100.73 and has returned -0.12% during the past week.
Synchrony Financial (NYSE:SYF) and American Express Company (NYSE:AXP) are the two most active stocks in the Credit Services industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect SYF to grow earnings at a 12.70% annual rate over the next 5 years. Comparatively, AXP is expected to grow at a 10.61% annual rate. All else equal, SYF’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 35.06% for American Express Company (AXP). SYF’s ROI is 23.90% while AXP has a ROI of 4.20%. The interpretation is that SYF’s business generates a higher return on investment than AXP’s.
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 +3.55. Comparatively, AXP’s free cash flow per share was +4.22. On a percent-of-sales basis, SYF’s free cash flow was 18.37% while AXP converted 10.83% of its revenues into cash flow. This means that, for a given level of sales, SYF is able to generate more free cash flow for investors.
SYF’s debt-to-equity ratio is 1.38 versus a D/E of 5.33 for AXP. AXP is therefore the more solvent of the two companies, and has lower financial risk.
SYF trades at a forward P/E of 12.03, a P/B of 2.17, and a P/S of 1.95, compared to a forward P/E of 15.01, a P/B of 4.20, and a P/S of 2.62 for AXP. SYF is the cheaper of the two stocks on an earnings, book value and sales basis. 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. SYF is currently priced at a -7.64% to its one-year price target of 43.05. Comparatively, AXP is -1.77% relative to its price target of 102.54. 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 AXP, which implies that analysts are more bullish on the outlook for AXP.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. SYF has a beta of 1.05 and AXP’s beta is 1.25. SYF’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. SYF has a short ratio of 2.61 compared to a short interest of 3.66 for AXP. This implies that the market is currently less bearish on the outlook for SYF.
Synchrony Financial (NYSE:SYF) beats American Express Company (NYSE:AXP) on a total of 13 of the 14 factors compared between the two stocks. SYF is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, SYF is the cheaper of the two stocks on an earnings, book value and sales basis, SYF is more undervalued relative to its price target. Finally, SYF has better sentiment signals based on short interest.