Synchrony Financial (NYSE: SYF) is edging closer to its total separation from General Electric Co. (NYSE: GE). While many analysts have prognosticated on what Synchrony may be like when it gets out from under GE’s shadow, 24/7 Wall St. has seen a key analyst downgrade from Bank of America Merrill Lynch on Wednesday.

The most basic part of the call is that analysts Kenneth Bruce and Charlie Pratt have downgraded the stock to Neutral from Buy. The firm’s price objective remains static at $33 in the call, which leaves an implied upside of only about 4%.

For a comparison to other analyst calls, Synchrony’s consensus analyst price target is $33.36. Also, the highest analyst price target is up at $38.00. As far as Merrill Lynch’s $31 price objective for GE, the firm is valuing GE above the consensus analyst target price of $28.43 — and GE’s street-high analyst target price is only $1.00 higher at $32.00.

The analysts believe that Synchrony Financial’s share price is approaching fair value. They also said that Synchrony’s management team has had good execution and that it now has a premium valuation against peers and a lack of near-term earnings catalysts.

On the bright side, Bruce and Pratt said:

Synchrony has delivered on its near-term growth targets and stronger than expected earnings in the two quarters since its IPO. The near-term operating metrics should remain positive, in our view, with platform revenues building due to healthy loan growth and spending volumes. Longer-term, we think the separation from General Electric will be a positive as it improves Synchrony’s float and is a precursor to a meaningful capital return. Our intermediate term earnings per share forecast is mostly in line with the Street, though lacks meaningful growth, as Synchrony positions for full separation.

ALSO READ: The Top 8 Dividend Stocks Owned by Warren Buffett and Berkshire Hathaway

Merrill Lynch also adjusted its targets for 2015, 2016 and for 2017. Its projected price-to-earnings (P/E) ratio of 12.5 for 2016 sounds low versus the market, but investors need to consider that banking and consumer financial stocks just tend to be valued at multiples lower than the broad market. Those new EPS forecasts were as follows:

• To $2.60 from $2.65 in 2015
• To $2.65 from $2.60 in 2016
• To $2.63 from $2.70 in 2017

These price adjustments reflect higher operating expenses now expected for 2015. One issue is front-end expenses being more loaded to mobile payments. Other key issues in the analyst call were as follows:

• 2015 guidance that calls for loan growth of 6% to 8%
• Net interest margin of 15.0% to 15.5%
• An efficiency ratio below 34%
• Roughly 5% average top-line growth over the next three years
• Roughly 3.0% return on assets
• A 12.5x P/E multiple to the firm’s 2016 EPS estimate

The Merrill Lynch analyst report further said:

We think the premium reflects the market’s anticipation for stronger asset growth and the potential for earnings per share growth. However, our earnings forecast suggests a more stable earnings per share profile as the faster growth is offset by higher operating expenses, possibly indicating the market may be overly optimistic toward near-term earnings per share growth. That said, we suspect valuation expansion is limited in the near term and will look for better clarity around the separation and budding capital return thesis to gauge further upside.

Shares of Synchrony were down 1.3% at $31.23 shortly after the opening bell on Wednesday. Its post-IPO range is $22.60 to $33.96. As a reminder, Synchrony’s IPO was back on July 30, 2014. It priced at $23.00 per share for some 125 million shares, implying post-IPO gains of almost 38% (before the downgrade), if investors got shares at the IPO and never sold.

As far as how the analysts rate General Electric, Merrill Lynch is more positive on the conglomerate structure than it is on Synchrony. For starters, it is a different analyst team. Also, the conglomerate has a price objective of $31.00, implying upside of 22.7% from the $25.27 close on Tuesday. That upside does not include GE’s current 3.6% dividend yield.

ALSO READ: Merrill Lynch Says Buy These 3 Top Radio Frequency Chip Stocks

Merrill Lynch’s latest report on GE discussed the potential exit of the commercial leasing and lending segment within GECC. That move would leave GE almost entirely as a pure industrial company, although the analysts think this is hard to see before the next Fed CCAR stress test in 2016 and in 2017.

On the dividend front, the March 12, 2015, report indicated that more regulatory visibility at GE Capital likely means that GE will be able to comfortably grow its dividend. The analyst team said:

GE is in the process of splitting-off Synchrony (GE Capital Consumer business) by the end of 2015, which will reduce the company’s earnings per share leverage to GECC to 25% from current ~50%. … We estimate that there is up to $25 billion of excess capital, which could get more of investors’ attention with rising debate of GECC future.

So, how has GE performed versus Synchrony? GE shares have underperformed the market and Synchrony since the July 30, 2014, IPO. GE shares were at $24.96 on a dividend-adjusted closing price back on July 30. That is a 1.2% gain for GE, versus almost 38% for Synchrony since that time.

The long and short of the matter is that Merrill Lynch sees Synchrony Financial being almost at fall value. They still see over 25% in total return (capital gain plus dividend) in General Electric.

ALSO READ: The 5 Most Shorted NYSE Stocks in March

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.