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Ally Financial Stock Down 16.6% in a Week: Should You Buy Now or Wait?
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Shares of Ally Financial (ALLY - Free Report) , one of the leading auto lenders, tumbled 16.6% last week. This was steeper than the industry’s decline of 0.4%.
One-Week Price Performance
Image Source: Zacks Investment Research
What Triggered the Sell-off in the ALLY Stock?
If you observe the above price chart, you will see that Ally Financial shares plunged on Tuesday, Sept. 10 and remained on that level till the end of the week.
On Sept. 10, Russ Hutchinson, ALLY’s chief financial officer, presented at the Barclays Global Financial Services Conference in New York. During the conference, he warned of the deteriorating credit condition of its borrowers.
Hutchinson said, “Our borrower is struggling with high inflation and cost of living, and now, more recently, a weakening employment picture.” He also noted that the company is witnessing increased delinquencies in its retail auto-loan business. Demand for auto loans is also subdued because of higher rates.
In July and August, ALLY’s delinquencies rose about 20 basis points (bps) above what was expected. Further, its net charge-offs or NCOs (debts that are not likely to be recovered) in the retail auto business were 10 bps higher than expectations in these two months.
Hutchinson stated that the company’s NCO rate is expected to rise further in the coming months (especially in the 61-plus-day delinquency bucket) as a large number of borrowers are struggling amid the weakening economic outlook.
What Next for Ally Financial?
As ALLY stock plunged last week, it is now trading at a loss in the year-to-date time frame. On the other hand, the industry gained 9.8%.
Its close peers – Capital One (COF - Free Report) and SLM Corporation (SLM - Free Report) – are better off. Shares of COF have rallied 6% so far this year and SLM is up 11%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Now, Ally Financial’s focus will be on managing capital levels and expenses. Nonetheless, Hutchinson noted that, for now, the company’s 2024 guidance remains unchanged.
ALLY expects loan losses to increase in 2024. Retail auto NCO rates are projected to be approximately 2.1% (a rise from 1.9% expected earlier), while consolidated NCOs are likely to be in the 1.45-1.5% range.
With the Federal Reserve embarking on its first interest rate cut since March 2020 later this week, Ally Financial will likely gain from it. The company’s net interest margin (NIM) in the third quarter is expected to expand in the low end of the 5-15 bps range from 3.3% in the second quarter of 2024.
The metric will rise further in the fourth quarter and reach 3.45-3.50%. This will result in a full-year 2024 NIM of almost 3.30%. NIM is expected to touch 4% by the end of 2025 as deposits eventually reprice in a lower interest rate environment.
Hence, rate cuts are expected to be immensely beneficial for ALLY’s top and bottom lines.
Sales Estimates
Image Source: Zacks Investment Research
EPS Estimates
Image Source: Zacks Investment Research
Nonetheless, as the company is expected to witness an increase in loan losses in the near term, its earnings will be under pressure. Hence, analysts are moving their earnings estimates lower over the past seven days.
Estimate Revision Trend
Image Source: Zacks Investment Research
Also, ALLY stock is trading below its 50-day simple moving average. This is often seen as a bearish signal. This movement suggests a potential continuation of the downward trend, at least in the short term.
50-Day Moving Average
Image Source: Zacks Investment Research
While it can easily be said that ALLY stock is a good long-term investment option, investors need to keep an eye on management comments and the third-quarter 2024 results (to be announced next month) before making any investment decision.
Image: Shutterstock
Ally Financial Stock Down 16.6% in a Week: Should You Buy Now or Wait?
Shares of Ally Financial (ALLY - Free Report) , one of the leading auto lenders, tumbled 16.6% last week. This was steeper than the industry’s decline of 0.4%.
One-Week Price Performance
Image Source: Zacks Investment Research
What Triggered the Sell-off in the ALLY Stock?
If you observe the above price chart, you will see that Ally Financial shares plunged on Tuesday, Sept. 10 and remained on that level till the end of the week.
On Sept. 10, Russ Hutchinson, ALLY’s chief financial officer, presented at the Barclays Global Financial Services Conference in New York. During the conference, he warned of the deteriorating credit condition of its borrowers.
Hutchinson said, “Our borrower is struggling with high inflation and cost of living, and now, more recently, a weakening employment picture.” He also noted that the company is witnessing increased delinquencies in its retail auto-loan business. Demand for auto loans is also subdued because of higher rates.
In July and August, ALLY’s delinquencies rose about 20 basis points (bps) above what was expected. Further, its net charge-offs or NCOs (debts that are not likely to be recovered) in the retail auto business were 10 bps higher than expectations in these two months.
Hutchinson stated that the company’s NCO rate is expected to rise further in the coming months (especially in the 61-plus-day delinquency bucket) as a large number of borrowers are struggling amid the weakening economic outlook.
What Next for Ally Financial?
As ALLY stock plunged last week, it is now trading at a loss in the year-to-date time frame. On the other hand, the industry gained 9.8%.
Its close peers – Capital One (COF - Free Report) and SLM Corporation (SLM - Free Report) – are better off. Shares of COF have rallied 6% so far this year and SLM is up 11%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Now, Ally Financial’s focus will be on managing capital levels and expenses. Nonetheless, Hutchinson noted that, for now, the company’s 2024 guidance remains unchanged.
ALLY expects loan losses to increase in 2024. Retail auto NCO rates are projected to be approximately 2.1% (a rise from 1.9% expected earlier), while consolidated NCOs are likely to be in the 1.45-1.5% range.
With the Federal Reserve embarking on its first interest rate cut since March 2020 later this week, Ally Financial will likely gain from it. The company’s net interest margin (NIM) in the third quarter is expected to expand in the low end of the 5-15 bps range from 3.3% in the second quarter of 2024.
The metric will rise further in the fourth quarter and reach 3.45-3.50%. This will result in a full-year 2024 NIM of almost 3.30%. NIM is expected to touch 4% by the end of 2025 as deposits eventually reprice in a lower interest rate environment.
Hence, rate cuts are expected to be immensely beneficial for ALLY’s top and bottom lines.
Sales Estimates
Image Source: Zacks Investment Research
EPS Estimates
Image Source: Zacks Investment Research
Nonetheless, as the company is expected to witness an increase in loan losses in the near term, its earnings will be under pressure. Hence, analysts are moving their earnings estimates lower over the past seven days.
Estimate Revision Trend
Image Source: Zacks Investment Research
Also, ALLY stock is trading below its 50-day simple moving average. This is often seen as a bearish signal. This movement suggests a potential continuation of the downward trend, at least in the short term.
50-Day Moving Average
Image Source: Zacks Investment Research
While it can easily be said that ALLY stock is a good long-term investment option, investors need to keep an eye on management comments and the third-quarter 2024 results (to be announced next month) before making any investment decision.
Currently, Ally Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.