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Morningstar | Walmart Spurns Synchrony to Partner With Capital One

Narrow-moat Synchrony will lose Walmart’s credit card portfolio to Capital One. Though we’ll wait until after Synchrony’s earnings report to adjust our projections, we estimate that we’ll decrease our fair value estimate by approximately 20%. Using end-of-May loan balances, Walmart accounts for about 13% of Synchrony’s total receivables. In addition, this doesn’t even include Sam’s Club, which likely accounts for another 8% to 10% of the company’s loan portfolio. We have to assume the Sam’s Club portfolio eventually makes its way to Capital One’s balance sheet. This is a significant blow to Synchrony, and in our minds, raises a lot of questions about Synchrony’s strategy and direction from here. This will certainly make growth more challenging, as many of Synchrony's other partners are beleaguered retailers, some of which are on the verge of bankruptcy. We will provide an additional update after Synchrony’s second-quarter conference call.

That said, Synchrony’s loss is Capital One’s gain, and we are surprised that shares in Capital One fell on the news of its victory. For now, we are maintaining our fair value estimate for Capital One at $127 per share, though we'll probably raise it once we know more about the terms of the deal.

For years, we have praised Capital One’s focus on being the bank with the most advanced technology. This is partly why we made Capital One a Best Idea when other banks offered similar discounts. According to published reports, technology and data offerings may have been a key consideration for Walmart in determining a partner for its credit card. In our opinion, public companies frequently cut corners in maintaining necessary long-term investments in brand and technology, whereas Capital One considers these vital investments in the company’s future. If Capital One’s technological capabilities are ultimately what persuaded Walmart, they can thank the years of spending despite objections from analysts wondering why margins aren’t higher. We’ll know more in the coming weeks on what drove Walmart into the arms of Capital One, but we suspect it has something to do with some innovation within payments, data, or underwriting.