Finance

Choosing Between Synchrony Financial (SYF) and Range Resources Corporation (RRC)

Synchrony Financial (NYSE:SYF) shares are down more than -22.35% this year and recently decreased -0.23% or -$0.07 to settle at $29.98. Range Resources Corporation (NYSE:RRC), on the other hand, is down -5.57% year to date as of 08/09/2018. It currently trades at $16.11 and has returned 5.57% during the past week.

Synchrony Financial (NYSE:SYF) and Range Resources Corporation (NYSE:RRC) are the two most active stocks in the Credit Services industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

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 17.17% annual rate over the next 5 years. Comparatively, RRC is expected to grow at a 61.27% annual rate. All else equal, RRC’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 33.07% for Range Resources Corporation (RRC). SYF’s ROI is 24.20% while RRC has a ROI of -0.40%. The interpretation is that SYF’s business generates a higher return on investment than RRC’s.

Cash Flow



Cash is king when it comes to investing. SYF’s free cash flow (“FCF”) per share for the trailing twelve months was +2.71. Comparatively, RRC’s free cash flow per share was -0.49. On a percent-of-sales basis, SYF’s free cash flow was 12.02% while RRC converted -4.68% 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.

Liquidity and Financial Risk

SYF’s debt-to-equity ratio is 1.50 versus a D/E of 0.73 for RRC. SYF is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

SYF trades at a forward P/E of 6.74, a P/B of 1.56, and a P/S of 1.31, compared to a forward P/E of 17.12, a P/B of 0.69, and a P/S of 1.45 for RRC. 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 -31.24% to its one-year price target of 43.60. Comparatively, RRC is -24.47% relative to its price target of 21.33. This suggests that SYF is the better investment over the next year.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. SYF has a beta of 1.00 and RRC’s beta is 0.57. RRC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. SYF has a short ratio of 1.71 compared to a short interest of 5.01 for RRC. This implies that the market is currently less bearish on the outlook for SYF.

Summary




Synchrony Financial (NYSE:SYF) beats Range Resources Corporation (NYSE:RRC) on a total of 9 of the 14 factors compared between the two stocks. SYF is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, SYF is the cheaper of the two stocks on an earnings and sales basis, SYF is more undervalued relative to its price target. Finally, SYF has better sentiment signals based on short interest.

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