Barclays turns neutral on consumer finance stocks as recession looms

Barclays turned neutral on consumer finance stocks (earlier positive) as they will likely get more inexpensive if a recession materializes in 2023 and “risk trading at trough multiples on trough earnings”.

“Given that Barclays economists are calling for a recession in 2023, we think these stocks could get more inexpensive before they work, so we view the risk/reward as balanced and downgrade Discover Financial Services (NYSE:DFS), Synchrony Financial (NYSE:SYF), OneMain Financial (OMF), and Oportun Financial (OPRT) to Equal Weight from Overweight,” said analyst Mark DeVries in a note to clients.

DeVries expects multiple expansion for the above stocks to be capped around current valuations, with significant downside risk in a recession.

Barclays also removed its top pick designation for OneMain (OMF).

Rationale for downgrades

• Discover Financial (DFS): “If we enter a recession, we see material risk from earnings downside and multiple re-rating, making the risk/reward more balanced.”
• Synchrony (SYF): “We either see a recession, which would result in material downside in earnings, or continued credit normalization, which would limit upside to the multiple. As a result, the risk/reward looks less attractive to us.”
• OneMain (OMF): “OMF is highly levered to consumer credit and the overall economy, so we believe current recession concerns will continue to weigh on the multiple.”
• Oportun (OPRT): “Macro concerns and negative sentiment around consumer credit should continue to weigh on the shares, and we struggle to see a material multiple re-rating this year.”

Earlier, credit card metrics climb closer to pre-pandemic levels in November.